I&M Bank Beats KRA in KSh713M Tax Dispute Over Loan Accounts

Business Daily reported the ruling on 12 October, saying the decision set aside the Kenya Revenue Authority's objection decision and removed a tax demand commonly rounded to KSh713M. The report lists KSh393.9M in principal tax, KSh19M in penalties and KSh299.4M in interest, which add up to KSh712.3M.

The case matters because banks set aside money against loans they expect may not be repaid, but tax law does not automatically treat every accounting movement as a deductible loss or taxable income. The dispute was about what the entries in I&M's accounts represented, rather than a general finding that all loan-loss provisions qualify for tax relief.

What the dispute was about

Business Daily reported that the Kenya Revenue Authority reviewed I&M's 2019 accounts and questioned a KSh1.3B difference connected to loan write-offs and the bank's provision for bad and doubtful debts. I&M's accounts showed total loan write-offs of about KSh2.91B. Part of that amount went directly through the profit-and-loss account, while another part was set against the provision for possible loan losses.

The bank said the tax authority had mistaken a reversal of an earlier accounting provision for a fresh bad debt written off during 2019. KRA's position, as described in the report, was that it could trace only about KSh698M in the movement through the provision account and could not reconcile the remaining KSh1.3B. I&M argued that the difference arose because the provision account showed a net movement, not the gross amount of loans written off.

The tribunal reportedly examined the gross loan balance alongside the provision account. It accepted the bank's explanation that the disputed amount was a write-back of an earlier provision and not a new debt write-off that generated a tax deduction. The ruling therefore turned on the records and the character of the accounting entries, not simply on whether the bank had loans that customers failed to repay.

Why IFRS 9 matters

I&M told the tribunal that the entries arose from its adoption of International Financial Reporting Standard 9, commonly called IFRS 9. The standard governs how financial assets and liabilities are classified and measured, and it requires banks to recognise expected credit losses on financial assets.

The IFRS Foundation's explanation of IFRS 9 describes the standard's approach to measuring financial instruments and accounting for expected credit losses.

In plain terms, a bank may estimate that some borrowers will not repay and record a provision to reflect that risk. The provision affects how the loan book is presented in the accounts. If a later entry reverses an earlier accounting treatment, that reversal does not necessarily mean cash came into the bank, a borrower repaid a loan, or the bank earned new income.

That distinction was central to I&M's argument. Business Daily reported that the tribunal found the two entries shifted amounts between the loan asset and the provision, and neither entry passed through the profit-and-loss account. It also reported that I&M supported its explanation with audited statements, a reconciliation schedule and tax returns covering 2018, 2019 and 2020.

Accounting treatment and tax treatment are related, but they are not identical. A financial reporting standard helps determine how an item appears in the accounts; tax law determines whether the item creates taxable income or an allowable deduction. The tribunal's reported finding was that this particular reversal did neither.

A narrow ruling, not a blanket tax exemption

The tribunal allowed I&M's appeal and set aside KRA's objection decision, according to Business Daily. That removes the disputed charge in this case. It does not establish that every provision for unpaid loans can be deducted from taxable income, nor that all accounting reversals are outside the tax net. Each dispute depends on the facts, the records and the tax provisions that apply.

The bank had also challenged the timing of KRA's assessment. Business Daily reported that the tribunal found the valid assessment was issued through the iTax system on 16 June 2025, within the relevant five-year period, while a letter sent on 1 July provided further details. The report also says a separate, smaller adjustment related to brokerage costs was not the subject of the same successful appeal.

Records will matter in other disputes

The case follows other Kenyan tax disputes over banks' treatment of loan losses. In August, Business Daily reported that the tribunal had allowed Consolidated Bank of Kenya to deduct a separate KSh264.9M bad-debt amount. That matter involved different facts and should not be treated as a blanket rule for all lenders.

The distinction is important for businesses facing tax audits: accounting records, tax computations and supporting reconciliations need to show exactly what an entry represents.

For businesses, investors and tax practitioners, the immediate lesson is narrow but practical. A tax assessment should distinguish a real deduction or income item from a balance-sheet adjustment, and a bank challenging an assessment needs records that reconcile the gross loan movements with the provision account. The decision does not remove KRA's power to challenge unsupported deductions.

Mwenendo has previously examined the wider burden of tax records and reporting in Kenyan businesses facing rising compliance costs. This case adds a banking example of why the detail behind an accounting entry can matter as much as the headline amount in a tax dispute.

Reporting credit: This report is based on Business Daily's article by Joseph Wangui of Nation Media Group, published on 12 October 2026. The full tribunal judgment was not independently located in the sources available for this filing, so the account of the ruling and the parties' arguments is attributed to that report.