KRA's Sh713 Million Tax Blunder Exposed as Tribunal Rules in Favour of I&M Bank Over Sh1.3 Billion Accounting Dispute
The Kenya Revenue Authority (KRA) has suffered a major defeat in a Sh713 million tax dispute with I&M Bank PLC after the Tax Appeals Tribunal found that the taxman had fundamentally misinterpreted a Sh1.313 billion accounting entry, treating a provision write-back as a bad-debt write-off and demanding hundreds of millions of shillings in taxes, penalties and interest. The ruling, delivered on October 9, 2026, raises serious questions about the quality of KRA's tax assessments, the competence of its financial reviews and the potential consequences of imposing substantial tax demands without properly understanding the accounting records under examination. At the centre of the dispute was a Sh1,313,248,000 entry in I&M Bank's 2019 financial statements. KRA maintained that the amount represented bad debts written off that the bank could not adequately explain. The bank insisted that the figure was merely an accounting write-back arising from the application of International Financial Reporting Standard 9 (IFRS 9), which governs the recognition and measurement of financial instruments. After examining the evidence, the Tribunal agreed with the bank. It established that the disputed amount was neither an expense deducted from taxable profits nor income earned by the bank. Instead, it was a balance-sheet adjustment involving the bank's loan book and its allowance for expected credit losses. The finding dismantled the foundation of KRA's Sh713 million demand and exposed how the misinterpretation of a single accounting entry can escalate into a multimillion-shilling dispute. How KRA Turned an Accounting Entry Into a Sh713 Million Tax Demand The controversy began with I&M Bank's corporation tax return for the 2019 financial year, filed on June 17, 2020. Under the applicable statutory limitation period, KRA generally had five years from that filing date to review the return and issue an amended assessment. That meant the deadline fell on June 17, 2025. KRA began communicating its findings to the bank in March 2025, sharing preliminary observations on March 14. However, the authority waited until June 16, 2025, just one day before the statutory deadline, to issue an amended assessment through the iTax system. The assessment demanded approximately Sh1.316 billion in principal tax and Sh961 million in interest, bringing the total to roughly Sh2.277 billion. The timing immediately became contentious. On June 17, KRA sent the bank an Excel spreadsheet titled Preliminary Findings 2019 , containing figures that differed from those in the iTax assessment. Then, on July 1, 2025, the authority issued another document titled Notice of Assessment for the Period 2019 , outlining six adjustments and placing the overall demand at approximately Sh2.343 billion. The July letter instructed I&M Bank to treat it as the formal assessment, even though it was issued after the five-year deadline. The conflicting figures and sequence of communications created a separate legal dispute over which document constituted the valid assessment and whether KRA had complied with the statutory time limit. For a tax authority entrusted with collecting billions of shillings from businesses and individuals, the episode raises legitimate questions about the clarity and consistency of its assessment procedures. KRA Retreats on Most Adjustments but Clings to Sh1.3 Billion Dispute I&M Bank formally objected to the assessment on July 23, 2025, challenging both its validity and the substance of the proposed tax adjustments. On September 19, 2025, KRA issued its Objection Decision, accepting most of the bank's arguments and withdrawing several adjustments that had formed part of the original multibillion-shilling demand. Only two disputed items remained. The first involved brokerage costs of approximately Sh1.67 million connected to exempt infrastructure bond income. After penalties and interest, the outstanding amount was reduced to Sh965,742, which I&M Bank paid on October 29, 2025. The second was far more consequential: the Sh1,313,248,000 entry that KRA insisted represented bad debts written off without adequate supporting documentation. That single item generated a tax demand of approximately Sh713 million, including penalties and interest. The authority's decision to maintain such a substantial demand ultimately proved decisive because the Tribunal found that KRA had misunderstood the accounting treatment underlying the figure. The Sh2.918 Billion Bad-Debt Figures KRA Got Wrong The financial records presented before the Tribunal showed that I&M Bank had written off approximately Sh2.918 billion in bad debts during 2019. Of that amount, Sh906 million had been charged directly to the profit and loss account. The bank added the figure back in its tax computation, meaning it did not claim the amount as a deduction against taxable income. The remaining Sh2.012 billion was written off against the existing provision for bad debts rather than being charged directly to the profit and loss account. This distinction was central to the dispute. KRA treated the amount written off against the provision as Sh698 million and questioned the difference of approximately Sh1.313 billion, maintaining that the bank had failed to account for the balance. However, the Tribunal found that Sh698 million was a net figure, not the gross amount written off. The correct accounting treatment involved writing off approximately Sh2.012 billion against the provision and subsequently writing back Sh1.313 billion into that provision. The difference between those two entries produced the net Sh698 million figure appearing in the records. In other words, the amount KRA treated as an unexplained bad-debt write-off was actually the write-back component of the accounting movement. The Tribunal accepted the bank's explanation that the transaction arose from changes associated with IFRS 9 and represented a reclassification between loans and the allowance held against them. Crucially, the Sh1.313 billion never passed through the profit and loss account. It did not create a tax deduction and did not constitute income. The distinction was fatal to KRA's position. A Tax Demand Built on the Wrong Accounting Interpretation The Tribunal's findings raise a serious concern about how KRA arrived at a Sh713 million demand without correctly identifying the nature of the underlying transaction. Bad-debt deductions can legitimately attract scrutiny because tax law imposes conditions on when such amounts may be deducted. The taxman is entitled to require supporting documentation and reject deductions that do not meet statutory requirements. But that was not the accounting treatment the Tribunal found in this case. I&M Bank had not claimed the disputed Sh1.313 billion as an allowable deduction. The amount was a provision write-back reflected through balance-sheet movements. By treating the entry as an unexplained bad-debt write-off, KRA pursued a tax adjustment based on a transaction that the Tribunal determined had not reduced the bank's taxable profits. That is a fundamental difference, not a minor disagreement over terminology. The case illustrates the financial consequences that can follow when gross accounting movements, net balances and provision reversals are not properly distinguished during a tax audit. A demand of Sh713 million is substantial by any measure. For a commercial bank, such an assessment creates legal costs, financial uncertainty and the need to defend its accounting records before a specialised tribunal. For smaller businesses without comparable resources, a similarly flawed assessment could create even greater financial pressure. I&M Bank Loses the Deadline Argument but Wins the Bigger Battle Despite the Tribunal's rejection of KRA's treatment of the Sh1.313 billion entry, I&M Bank did not succeed on every issue raised in its appeal. The bank argued that the June 16, 2025 iTax assessment was invalid because it lacked sufficient reasons and that the July 1 letter was the true assessment. Because the July letter came after the statutory deadline and was issued outside iTax, the bank maintained that it was time-barred and legally ineffective. KRA defended the June 16 assessment, arguing that it had been issued within the five-year limitation period and contained the required information. The Tribunal agreed with KRA on this procedural question. It found that the June 16 assessment contained the relevant tax period, tax amounts, penalties, interest, payment information and instructions on how to object. The subsequent spreadsheet and July letter were treated as explanatory documents rather than fresh assessments. Consequently, the Tribunal ruled that KRA had complied with the statutory deadline, even though the assessment was issued just one day before the limitation period expired. This aspect of the judgment is important because it shows that the bank's victory was not based on a technical escape from taxation. The Tribunal upheld KRA's authority to issue the assessment within time but rejected the substantive basis of the disputed Sh713 million demand. Tribunal Delivers Major Blow to KRA's Position On October 9, 2026, the Tax Appeals Tribunal allowed I&M Bank's appeal and set aside KRA's Objection Decision dated September 19, 2025. The Tribunal directed each party to bear its own costs, bringing the appeal to a conclusion in the bank's favour. The decision effectively rejected KRA's attempt to impose tax, penalties and interest arising from its treatment of the Sh1.313 billion accounting entry. The outcome demonstrates why tax assessments must be supported by a proper examination of financial statements and the accounting principles applied by taxpayers. It also illustrates the importance of independent appellate oversight in resolving disputes between KRA and businesses. The Tribunal did not find that KRA acted fraudulently or deliberately misrepresented the bank's records. Its decision was based on the evidence concerning the accounting treatment and the legality of the assessment. Nevertheless, the rejection of such a large adjustment raises legitimate questions about the internal review processes that allowed the demand to proceed through objection and into litigation. Who Takes Responsibility for a Sh713 Million Assessment That Failed? The ruling leaves KRA facing difficult questions about the quality of its audit and assessment procedures. How did the authority arrive at the conclusion that Sh1.313 billion represented untraceable bad debts when the bank's audited financial statements supported a different accounting explanation? Why did the disputed adjustment survive the objection process despite the bank's explanation that the amount was a provision write-back rather than a tax deduction? And what internal checks exist to ensure that complex financial reporting adjustments are reviewed by officers with the necessary accounting expertise before substantial assessments are confirmed? These are questions about institutional accountability rather than accusations against individual officers. KRA has a legitimate responsibility to enforce tax laws and protect public revenue. But that responsibility also requires accuracy, consistency and fair treatment of taxpayers. An aggressive approach to revenue collection cannot substitute for a technically sound assessment. When an accounting entry is misunderstood, the consequences extend beyond the amount demanded. Businesses must commit resources to objections, legal representation and appeals, while the tax authority also incurs administrative and litigation costs. The public is entitled to expect that disputes of this magnitude will prompt an internal examination of what went wrong. A Warning About Tax Enforcement and Financial Accountability The I&M Bank dispute is particularly significant because it involved a regulated financial institution whose accounts are prepared under established reporting standards and subjected to external audit. Banks routinely make complex accounting adjustments involving expected credit losses, loan impairments, provision reversals and write-offs. Those transactions can have different tax consequences depending on whether they affect taxable income, represent balance-sheet movements or qualify for statutory deductions. Tax officials must distinguish between these categories before determining that additional tax is payable. The Tribunal's decision reinforces the principle that a tax demand must be grounded in the actual economic and accounting substance of the transaction under examination. The case also highlights the value of properly documented financial records. I&M Bank's audited statements and reconciliation of the disputed amounts enabled the Tribunal to distinguish the gross write-off from the net movement in the provision. That distinction ultimately determined the outcome of a dispute involving hundreds of millions of shillings. KRA Must Learn From the I&M Bank Defeat The October 9 ruling should serve as a warning to KRA that large tax assessments require more than numerical discrepancies and demands for explanations. Where a taxpayer demonstrates that a disputed entry was a balance-sheet reclassification rather than an expense deducted from taxable profits, the authority must examine that explanation carefully before confirming an additional tax liability. The Tribunal's decision shows that KRA acted within the statutory assessment period but failed to sustain its position on the central accounting issue. For I&M Bank, the ruling represents a substantial victory against a Sh713 million demand arising from the disputed Sh1.313 billion entry. For KRA, it is a reminder that the credibility of tax enforcement depends not only on how much revenue is assessed but also on whether those assessments withstand independent legal and technical scrutiny. A Sh1.313 billion accounting write-back became the foundation of a Sh713 million tax demand. After months of objections and litigation, the Tribunal concluded that KRA had misunderstood the transaction. That is the central failure exposed by this case, and it deserves an explanation from the authority responsible for administering Kenya's tax system.