(Being an Appeal from the Judgment of the Tax Appeals Tribunal at Nairobi delivered on 21st February 2025 in Tax Appeals Tribunal Appeal No. E419 of 2024)
Background
1. The Commissioner of Legal Services, under the Kenya Revenue Authority, the appellant herein, was dissatisfied with the decision of the Tax Appeals Tribunal (TAT) delivered on 21st February 2025 in Tax Appeal Tribunal Appeal No. E419 OF 2024, SBM Bank Kenya Limited v Commissioner of Legal Services and Board Coordination. The appellant filed this appeal through a memorandum of appeal dated 17th April 2025. The record of appeal is dated 30th May 2025.
Grounds of Appeal
2. The appeal is based on the following grounds:
a) The Tribunal erred in law and in fact by inferring to the definition of interest in Income Tax Act.
b) The Tribunal erred in law and in fact by finding that the additional interest for late payment of loans does not fall within the meaning of other fees and is therefore exempt from Excise duty.
c) The Tribunal erred in law and in fact in finding that the penal income earned by the respondent were more in the nature of an interest on loan or return on loan rather than a fee, charge or commission charged by a financial institution.
3. The appellant therefore prays for orders that the judgment of the TAT delivered on the 21st February 2025 be set aside and or vacated, the appellant’s objection decision be upheld and the costs of this appeal be awarded to the appellant.
The Facts
4. The facts leading to the tax assessment dispute between the appellant and the respondent, as contained in the statement of facts filed by the parties before the TAT and this court, the submissions by counsels before the TAT, the judgment of the TAT, and submissions in this appeal, are as follows.
5. The Commissioner of Domestic Taxes a principal officer of the Kenya Revenue Authority under the Kenya Revenue Authority Act (Cap. 469) Laws of Kenya conducted an audit of the books, records and accounts of the respondent for the period September 2018 to September 2023 was conducted by the Commissioner of Domestic Taxes, The audit involved a review of the respondent’s tax affairs and the scope of the examination covered the respondent’s excise duty obligations for the audit period. Following the audit, the Commissioner raised tax assessments vide a letter dated 13th December 2023 for the years of income 2018 to 2023 against the respondent and demanded additional tax of KShs. 176,442,491/= later revised to KShs 174,744,928.51 being principal tax, penalties, and interest.
6. Among the issues that led to the demand for tax was the interpretation of Clause 9 in the respondent’s Letter of Offer to its customers which provided that, “If the borrower fails to pay the sum payable under this letter on its due date for payment, the borrower will (without prejudice to the exercise by the bank of any other rights or remedies in its favour), pay to the bank interest at the rate of 1.25% per month over and above the then subsisting rate of interest payable by the borrower.”
7. According to the appellant, the phrase, “pay to the bank interest at the rate of 1.25% per month over and above the then subsisting rate of interest payable by the borrower” means that when a borrower fails to pay monthly instalments as prescribed in their loan contract, a fine is charged on the monthly repayments due over and above normal interest rates on the principal amounts due which the appellant classified as penal income. That this income is considered as a “fee” that should be charged excise duty in line with Part II, Paragraph 4 of the First Schedule to the Excise Duty Act (Cap. 472) Laws of Kenya which provides that excise duty on other fees charged by financial institutions shall be 20% of the excisable value.
8. Further that, Part III of the First schedule to the Excise Duty Act defines “other fees” to include any fees, charges or commissions charged by financial institutions relating to their licensed activities, but does not include interest on loan or return on loan or any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations made thereunder.
9. The respondent’s case on the other hand was that the penal interest earned is additional interest income received on outstanding loans or a return on loan, and not a ‘fee’. That it is therefore not subject to excise duty under Paragraph 4 of Part II of the First Schedule of the Excise Duty Act, (Cap. 472) Laws of Kenya, which levies excise duty on other fees charged by financial institutions.
10. The respondent filed an Objection to the Tax Assessment based on the reasons above. On 4th March 2024, the Commissioner issued the appellant with its Objection Decision. In the Objection Decision, the Commissioner reiterated their position that the penalty charged by the bank to the borrower is what is classified as penal income and further that penal income falls under “other fees” and therefore should be charged excise duty. The Objection Decision rejected the Objection by the respondent in toto with an indication that the tax assessment would be confirmed.
11. The respondent was dissatisfied with the Objection Decision and lodged an Appeal with the TAT vide a Notice of Appeal dated and filed on 3rd April 2024.
12. The TAT considered the dispute and found only one issue for determination, that is, whether the Commissioner erred in law and in fact by assessing excise duty on amounts that are not subject to excise duty under the Excise Duty Act, specifically, whether the additional amount that the respondent charges its borrowers when they fail to repay their loans is interest or a fee. Upon considering the law and its previous decisions on the matter, the TAT made a judgment agreeing with the respondent’s position that that the appellant erred in law and fact by assessing excise duty on amounts that are not subject to excise duty under the Excise Duty Act, that is, that the additional amount that the respondent charges its borrowers when they fail to repay their loans is interest and not fees.
13. That decision led to the present appeal.
Submissions
14. The appeal was disposed of on the written submissions of the parties.
15. In its submissions dated 4th July 2025 the appellant raised one issue for determination, that is whether the respondent’s penal income is chargeable to excise duty.
16. In its submissions dated 3rd June 2025, filed before the appellant filed its submissions, the respondent raised the following five issues for determination:
a. whether the default interest earned by the respondent was excluded from the definition of ‘other fees’ as per the Excise Duty Act during the period 7th November 2019 to 1st July 2021;
b. whether additional interest for late payment of loans is excluded from the meaning of ‘other fees’ and is therefore exempt from excise duty;
c. whether default interest is in the nature of an interest on loan or return on loan rather than a fee, charge or commission charged by a financial institution;
d. whether the tax assessments in relation to September 2018 to February 2019 were time barred; and
e. whether the Tribunal was justified to refer to the definition of interest in the Income Tax Act.
17. In its supplementary submissions dated 15th July 2025 the respondent adopted the issue for determination as raised by the appellant but framed it as whether additional interest for late payment of loans is excluded from the meaning of ‘other fees’ and is therefore exempt from excise duty.
18. The facts of the dispute herein seem straightforward because they are largely not in contention. They revolve around the provisions of Clause 9 in the respondent’s Letter of Offer to its clients or borrowers. I have looked at the two sample Letters of Offer provided by the respondent. Clause 9 in the respondent’s Letter of Offer to its clients provides as follows:
“If the Borrower fails to pay the sum payable under this letter on its due date for payment, the Borrower will (without prejudice to the exercise by the bank of any other rights or remedies in its favour) pay to the bank interest at the rate of 1.25% per month over and above the then subsisting rate of interest payable by the borrower under clause 8 above (the Default Rate) on all monies due with effect from the date of the same becoming due until actual payment of such monies in full (together with accrued interest). The Borrower acknowledges and agrees that the aforesaid rate of interest represents a reasonable pre-estimate of the loss to be suffered by the Bank in funding the default of the Borrower.
Interest payable on the facility will be calculated on the basis of actual days elapsed over a 365-day year. Interest so calculated will be payable monthly in arrears by debit of the Borrower’s current account with the Bank. The Borrower must ensure that interest is service fully at the end of each month. Failure to which interest will be compounded monthly. The Bank however reserves the right to vary the interest rate, at any time and in its absolute and unfettered discretion. A 30-day notice prior to effecting the variation of interest shall be served on the Borrower.”
19. Clause 8 referred to in the caption above is titled “Interest Rate” and provides for various rates of interest chargeable on the various credit accommodations such as Term Loan facility, Overdraft facility and Insurance Premium Finance Line facility provided by the respondent to its customer. These respectively fall under paragraphs (a), (b) and (c) of Clause 8. There is a paragraph (d) which is a replica of the first part of Clause 9 up to the point where it reads “Clause 8 above.” This would mean that either this paragraph (d) is otiose or there was an attempt to remove Clause 9 and place it as a paragraph under Clause 8.
20. Clause 10 provides for Commissions and other charges enumerated in paragraphs (a), (b), and (c), respectively as Processing fee, Invoice Discounted and Supplier Invoice Financed each attracting its own rate of charge. Paragraph (d) under that clause provides that “Commisions and other bank charges will be levied according to the prevailing Bank tariff sheet already provided to the borrower. There are two more commissions under the same paragraph charged on Letter of Credit and Bid Bond and Guarantee.
21. It is apparent from Clause 9 as reproduced above that the respondent charges default interest of 1.25% per month for late payment of the principal amount of loan or other facility by the borrower, over and above the normal rate of interest. Both parties have referred to this extra charge as penal interest.
22. The issue in contention is whether this extra charge is “interest” and therefore not chargeable to excise duty or is a “other fees” and therefore chargeable to excise duty under the Excise Duty Act.
23. The appellants submit that they deduced that when a borrower fails to pay monthly instalments as prescribed in their loan contract a fine or penalty is charged on the monthly repayments due over and above normal interest rates on the principal amounts due. The extra charge is what is classified as penal income. According to the appellant this income is considered as a fee that should be charged excise duty under the Excise Duty Act.
24. The respondent on its part submits that this is simply interest as stated under Clause 9 of its Letter of Offer and cannot be taken to mean “other fees.”
25. Under the Excise Duty Act, the sections that are material and refer to “interest” and “other fees” are as follows:
I. Section 9(6) of the Excise Duty Act which provides that the excisable value of excisable services specified in item 4 of Part II of the First Schedule shall not include interest or an insurance premium.
II. Part II, Paragraph 4 of the First Schedule to the Excise Duty Act which provides that, “excise duty on other fees charged by financial institutions shall be 20% of the excisable value.
III. Part III of the First schedule to the Excise Duty Act which defines "other fees" to include any fees, charges or commissions charged by financial institutions relating to their licensed financial institutions, but does not include interest on loan or return on loan or an insurance premium or premium based or related commissions.
26. To justify its position, the appellant submits that the reference to the “penal income” as “additional interest” by the respondent in Clause 9 of the Letter of Offer is simply meant to “mislead the court” and also describes the same as “hidden charges” equivalent to processing fees, prepayment charges, late payment penalties, penalty interest, documentation charges, insurance charges and loan cancellation fees to which excise duty is chargeable by the appellant.
27. The respondent on its part submits that the appellant’s interpretation of default interest would lead to an absurdity and a defeat of logic. Further that the appellant’s argument that the wording of default interest as ‘additional interest’ is meant to mislead the court is fallacious and has no basis in the English language nor law. Further that whether or not interest is charged on the condition of some future event occurring, or an ongoing event subsisting, does not change its basic meaning. The respondent submits further that the wording of ‘default interest’ is a function of commercial relations and the communication of consequences for failure to repay a loan, rather than a re-categorization of the primary charge or cost charged on a loan.
Analysis
28. For me, the issue turns on the authority from where each party seeks to interpret the default interest under Clause 9 either as “other fees” as contended by the appellant or “interest” as maintained by the respondent.
29. To begin with, both parties are agreed that the plain language or literal meanings of the words “interest” and “other fees” in the Excise Duty Act have to be considered as this is in line with the law on interpretation of tax statutes.
30. Both parties therefore agree to the holding of the Court in the case referred to by the respondent of Cape Brandy Syndicate v I.R Commissioners [1921] 1KB where the Court held that:
“… in a taxing Act one has to look at what was clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”
31. Further in the case of Stanbic Bank Kenya Limited v Kenya Revenue Authority [2009] KECA 427 (KLR) the Court of Appeal, Nyamu, J.A. stated as follows in respect of the use of ordinary meaning of words in a statute:
“In my interpretation of the law, it is quite evident that I have not sought any assistance from outside a dictionary in ordinary use. Moreover, I have not strained the meaning of the words in order to achieve any particular result. I have simply adopted the ordinary meaning of the words used in the relevant tax statute. This is because as regards tax law the issue of intention or intendment does not arise. If there is any ambiguity, and I did not detect any in my analysis, the same must be construed in favour of the tax payer. In tax law, the converse is also true that if the meaning is clear, that tax is chargeable, the issue of what was intended is not the function of the court and where tax liability is expressed and located by law the courts must uphold the taxman’s position.”
32. The appellant submits further that while both penalties and interest are costs associated with borrowing money, interest is the cost of borrowing itself, while penalties are fees charged for failing to meet the terms of the loan agreement. Unfortunately, the appellant does not provide any authority they rely upon to assert that penalty can only be construed as fees and not interest.
33. On its part the respondent submits that the literal wording of the Excise Duty Act excludes interest on loans from the ambit of excise duty. As such, that the Tribunal correctly found that the additional interest on loans is excluded from the meaning of ‘other fees’ and is therefore not subject to excise duty.
34. The respondent submits further that it relies on the ordinary meaning of the word ‘interest’ as used in the definition of ‘other fees’ under paragraph 4 of Part III of the First Schedule to the Excise Duty Act.
35. Further that the Black’s Law Dictionary, 10th Edition 2014 at page 935 defines interest as follows:
“The compensation fixed by agreement or allowed by law for the use or detention of money, or for the loss of money by one who is entitled to its use; especially, the amount owed to a lender in return for the use of borrowed money.”
36. Further, the Oxford Dictionary, 8th Edition defines interest as follows:
“(1) the money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt; and
(2) the extra money that you pay back when you borrow money or that you receive when you invest money; to pay interest on a loan.”
37. The respondent submits further that the literal definition of interest has been upheld in the case of Mwalimu National Sacco Society Ltd v Commissioner of Legal Services and Board Coordination [2024] KETAT 1013 (KLR) where the Court stated that:
“…interest is the compensation paid in consideration of using someone else’s money, or put differently, it is the consideration that is paid for keeping someone out of the use of his money.”
38. Learned counsel further submits that the default interest fits within the definition of return on loan as envisioned in the Excise Duty Act, since the default interest is a constituent of the return that the respondent receives having advanced the loan to its customer.
39. In support of the respondent’s submissions, learned counsel cites the case of Commissioner of Domestic Taxes v Key Microfinance Bank Limited [2023] KEHC 19067 (KLR) where the court agreed with the findings of the Tax Appeals Tribunal that interest charged for late repayment of loans by borrowers is excluded from excise duty.
40. The Court of Appeal emphasized on the strict interpretation of tax statues in the case of Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 others [2019] KECA 500 (KLR) by stating that:
“...when it comes to interpretation of tax legislation, the statute must be looked at using slightly different lenses. With regard to tax legislation, the language imposing the tax must receive a strict construction. Judge Rowlett in his decision in Cape Brandy Syndicate v I.R. Commissioners [1921] 1KB (cited by the appellants), expressed the common law position in this area when he stated;
‘…in a taxing Act one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used'.
(Emphasis ours)
Similar statements have been made in several judgments on tax cases. In Scott v. Russell (Inspector of Taxes), [1948] 2 All ER Lord Simonds expressed:
“… there is a maxim in Income tax law which, though it may sometimes be over-stressed, yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him.”
This common law position is what pertains here and has been adopted by our courts as good law. In our view there cannot be an equitable construction of income tax legislation. The norm is that a taxing legislation must be construed with perfect strictness whether or not such construction is against the State or against the person sought to be taxed. If however there is any real ambiguity in a taxing Act, such ambiguity may be resolved in favour of the taxpayer, or, as it is sometimes stated: contra fiscum. The following excerpt from the renowned author of Bennion on Statutory Interpretation, 5th Edition, summarises the correct position in law as far as interpretation of tax legislation is concerned.
“I find that they cannot tax the applicant twice over Bennion adds: - ‘Nevertheless taxation is clearly “penal” within this section of the Code, and must not be enforced by the courts unless clearly imposed. As Evans LJ said in the context of tax legislation it is necessary to consider the legal analysis with the utmost precision so that the taxpayer shall not become liable to tax unless this is clearly and unequivocally the object of the statutory provisions ... The Courts are reluctant to adopt a construction permitting a person’s tax liability to be fixed by administrative discretion….’ This is how this court has regarded the assessment of tax on an arbitrary input-output formulae because it is not supported by any law nor is its retroactivity permitted by law…The same principles as above, were accepted and applied in the case of Cape Brandy Syndicate vs. Inland Revenue Commissioners [1921] KB 64 where Ronlat J, restated the principle in these words: ‘in a taxing Act clear words are necessary in order to tax the subject. Too wide and fanciful a construction is often to be given to that maxim, which does not mean that words are to be unduly restricted against the Crown or that there is to be any discrimination against the crown in those Acts. It simply means that in a taxing Act one has to look merely at what is clearly said. There is no reason for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look fairly on the language used.’… Again, in the case of Ramsay Ltd vs. Inland Revenue Commissioner [1992] AC 300 the same principles were expressed as follows:- ‘A subject is only to be taxed on clear words not upon intendment, or upon the “equity” of an Act’. Any taxing Act of Parliament as to be construed in accordance with this principle.” (Emphasis supplied by the Court of Appeal)
41. In tax law, the onus is upon the tax payer to prove that it is not liable to pay the tax as assessed by the tax authority. In Primarosa Flowers Limited v Commissioner of Domestic Taxes [2019] KEHC 9431 (KLR) the High Court stated as follows:
“I find the Appellant has not discharged the burden of proof to the required standard of proof. In Mulherin vs Respondent of Taxation [2013] FCAFC 115 the Federal Court of Australia held that in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”
42. From the facts of the case presented before the TAT and the submissions above by learned counsel for the respondent, it is apparent that in maintaining that the default interest cannot be construed to mean “other fees,” the respondent relies on the authority of the Excise Duty Act itself calling for the strict interpretation of the provisions.
43. Both parties are agreed with the definition as provided for in the Black’ s Law Dictionary (confirm this) that interest is the compensation for temporarily parting with your funds or charges for borrowing money. See also Commissioner of Domestic Taxes v/s Stima Sacco (E090 of 2021).
44. The appellant has cited the case of National Bank of Kenya Ltd v Commissioner of Domestic Taxes [2022] KEHC 10549 (KLR)
“A strict interpretation of the Finance Act, 2013 meant that all fees incidental to obtaining a loan would be subjected to Excise Duty while the interest earned from the loan would be exempted.
There are various fees associated with acquiring a loan and they include commitment fees, appraisal fees, front-end fees, arrangement fees, loan administration fees and many other fees and charges that lenders charge when lending. These are distinguishable from interest as they are only costs incidental to the loan while interest is the main consideration that is charged for the loan. The rest are only expenses incurred in obtaining the loan.
Accordingly, the Tribunal erred when it held that commitment and appraisal fees are part of interest and are exempt from Excise Duty. Obviously, these fees are just but expenses and not interest and are therefore not exempt from Excise Duty.”
45. Further, in Commissioner of Domestic Taxes v Sidian Bank Limited [2023] KEHC 18382 (KLR) the High Court stated that:
“While I agree with the Respondent that the credit card services offered by the Respondent to its customers may be termed as a ‘soft loan’, a plain and literal interpretation of the term “interest” above can only lead to the conclusion that all fees incidental to obtaining such a ‘loan’ such as cash advance/balance transfer/commitment/facilitation/ processing fees among others would be subjected to Excise Duty while the interest earned from using the said credit card would be exempted. I therefore agree with the Commissioner that the Tribunal erred in its findings that all the fees and charges earned by the Respondent from the credit card transactions were akin to interest and therefore non-excisable. This ground of appeal by the Commissioner therefore succeeds.”
46. My understanding of these statements does not indicate at all that the default interest charged by the bank for a customer defaulting on loan repayment is included in what the court called “all fees incidental to obtaining such a loan” and as followed by the enumerated items which are subject to excise duty. It is in fact notable that the court in those cases did not include extra interest as part of the enumerated items which fell under fees and were subject to excise duty.
47. The appellant contents that the TAT erred in making reference to the Income Tax Act in defining the word interest. I do not think it matters much. Given the strict interpretation of tax statutes so as to give the provisions their plain and literal meaning I would not have found it necessary to resort to the defining of interest as provided for under the Income Tax Act. However, this issue has received judicial consideration in several cases. In Commissioner of Domestic Taxes v Barclays Bank of Kenya Limited (Now ABSA Bank Kenya PLC) [2023] KEHC 24807 (KLR) and Commissioner of Domestic Taxes v Barclays Bank of Kenya Limited (Now ABSA Bank Kenya PLC) [2023] KEHC 24807 (KLR), where the High Court, E. C. Mwita, J. (as he then was) agreed with TAT that the Income Tax Act is closely related with Excise Duty Act and the definition of interest in the former Act could be used in the latter Act. Consequently I find that the Tax Appeals Tribunal did not err by inferring to the definition of interest in Income Tax Act since the two Acts are pari materia.
48. In the case of Commissioner of Domestic Taxes v Barclays Bank of Kenya Limited (Now ABSA Bank Kenya PLC) [2023] KEHC 24807 (KLR) the High Court considered this issue thus:
“...that the definition of interest is not limited to numerical percentage rates only but encompasses other charges. In that regard, credit related charges including late payment interest, facilitation fee and processing charges fall within the definition of interest and are therefore exempt from excise duty.”
Determination
49. The appellant makes the following sweeping submissions to support its position, but unfortunately without offering any legal grounding for them:
12. The penalty charged by the bank to the borrower is therefore classified as penal income which falls under other fee.
13. The Appellant further notes in the contracts provided by the Respondent, referred the penal income as additional interest. This position was simply meant to mislead the court. The charge of penalty is not a charge of additional interest.
14. That by definition as in the Black's Law Dictionary it is clear that at no point can a penalty become interest payment as the two are completely different and independent of each other.
15. Interest can be defined as the compensation for temporarily parting with your funds or charges for borrowing money.
16. In the case of Commissioner of Domestic Taxes v/s Stima Sacco (E090 of 2021) Interest was defined as consideration payable for keeping one away from his money or for using someone else’s money.
17. It is also worth noting that ‘Interest’ aside there are other hidden charges applicable to the borrower. Such charges include processing fees, prepayment charges, late payment penalties, penalty interest, documentation charges, insurance charges and loan cancellation fees.
18. While both penalties and interest are costs associated with borrowing money, interest is the cost of borrowing itself, while penalties are fees charged for failing to meet the terms of the loan agreement.
19. Penalty interest as worded by Salaam Microfinance bank is therefore part of other hidden charges and not interest. Other terms used interchangeably with the word penalty interest includes default charge, penal charge, late payment fees and late payment interest.
50. From the foregoing excerpt the appellant would need to justify for instance why “penal income” should be classified as “other fees” and not “interest” as stated in the Letter of Offer. The contention that it was provided for as such simply to mislead the court and also that “at no point can a penalty become interest payment as the two are completely different and independent of each other” have no foundation other than being the writer’s views. The definition of interest in the Black's Law Dictionary as cited by the appellant as “the compensation for temporarily parting with your funds or charges for borrowing money” does not really provide as the appellant submits that a penalty cannot in any way be considered as interest.
51. The issue however is not whether the default interest is a penalty or not. I think the respondent
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Background
1. The Commissioner of Legal Services, under the Kenya Revenue Authority, the appellant herein, was dissatisfied with the decision of the Tax Appeals Tribunal (TAT) delivered on 21st February 2025 in Tax Appeal Tribunal Appeal No. E419 OF 2024, SBM Bank Kenya Limited v Commissioner of Legal Services and Board Coordination. The appellant filed this appeal through a memorandum of appeal dated 17th April 2025. The record of appeal is dated 30th May 2025.
Grounds of Appeal
2. The appeal is based on the following grounds:
a) The Tribunal erred in law and in fact by inferring to the definition of interest in Income Tax Act.
b) The Tribunal erred in law and in fact by finding that the additional interest for late payment of loans does not fall within the meaning of other fees and is therefore exempt from Excise duty.
c) The Tribunal erred in law and in fact in finding that the penal income earned by the respondent were more in the nature of an interest on loan or return on loan rather than a fee, charge or commission charged by a financial institution.
3. The appellant therefore prays for orders that the judgment of the TAT delivered on the 21st February 2025 be set aside and or vacated, the appellant’s objection decision be upheld and the costs of this appeal be awarded to the appellant.
The Facts
4. The facts leading to the tax assessment dispute between the appellant and the respondent, as contained in the statement of facts filed by the parties before the TAT and this court, the submissions by counsels before the TAT, the judgment of the TAT, and submissions in this appeal, are as follows.
5. The Commissioner of Domestic Taxes a principal officer of the Kenya Revenue Authority under the Kenya Revenue Authority Act (Cap. 469) Laws of Kenya conducted an audit of the books, records and accounts of the respondent for the period September 2018 to September 2023 was conducted by the Commissioner of Domestic Taxes, The audit involved a review of the respondent’s tax affairs and the scope of the examination covered the respondent’s excise duty obligations for the audit period. Following the audit, the Commissioner raised tax assessments vide a letter dated 13th December 2023 for the years of income 2018 to 2023 against the respondent and demanded additional tax of KShs. 176,442,491/= later revised to KShs 174,744,928.51 being principal tax, penalties, and interest.
6. Among the issues that led to the demand for tax was the interpretation of Clause 9 in the respondent’s Letter of Offer to its customers which provided that, “If the borrower fails to pay the sum payable under this letter on its due date for payment, the borrower will (without prejudice to the exercise by the bank of any other rights or remedies in its favour), pay to the bank interest at the rate of 1.25% per month over and above the then subsisting rate of interest payable by the borrower.”
7. According to the appellant, the phrase, “pay to the bank interest at the rate of 1.25% per month over and above the then subsisting rate of interest payable by the borrower” means that when a borrower fails to pay monthly instalments as prescribed in their loan contract, a fine is charged on the monthly repayments due over and above normal interest rates on the principal amounts due which the appellant classified as penal income. That this income is considered as a “fee” that should be charged excise duty in line with Part II, Paragraph 4 of the First Schedule to the Excise Duty Act (Cap. 472) Laws of Kenya which provides that excise duty on other fees charged by financial institutions shall be 20% of the excisable value.
8. Further that, Part III of the First schedule to the Excise Duty Act defines “other fees” to include any fees, charges or commissions charged by financial institutions relating to their licensed activities, but does not include interest on loan or return on loan or any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations made thereunder.
9. The respondent’s case on the other hand was that the penal interest earned is additional interest income received on outstanding loans or a return on loan, and not a ‘fee’. That it is therefore not subject to excise duty under Paragraph 4 of Part II of the First Schedule of the Excise Duty Act, (Cap. 472) Laws of Kenya, which levies excise duty on other fees charged by financial institutions.
10. The respondent filed an Objection to the Tax Assessment based on the reasons above. On 4th March 2024, the Commissioner issued the appellant with its Objection Decision. In the Objection Decision, the Commissioner reiterated their position that the penalty charged by the bank to the borrower is what is classified as penal income and further that penal income falls under “other fees” and therefore should be charged excise duty. The Objection Decision rejected the Objection by the respondent in toto with an indication that the tax assessment would be confirmed.
11. The respondent was dissatisfied with the Objection Decision and lodged an Appeal with the TAT vide a Notice of Appeal dated and filed on 3rd April 2024.
12. The TAT considered the dispute and found only one issue for determination, that is, whether the Commissioner erred in law and in fact by assessing excise duty on amounts that are not subject to excise duty under the Excise Duty Act, specifically, whether the additional amount that the respondent charges its borrowers when they fail to repay their loans is interest or a fee. Upon considering the law and its previous decisions on the matter, the TAT made a judgment agreeing with the respondent’s position that that the appellant erred in law and fact by assessing excise duty on amounts that are not subject to excise duty under the Excise Duty Act, that is, that the additional amount that the respondent charges its borrowers when they fail to repay their loans is interest and not fees.
13. That decision led to the present appeal.
Submissions
14. The appeal was disposed of on the written submissions of the parties.
15. In its submissions dated 4th July 2025 the appellant raised one issue for determination, that is whether the respondent’s penal income is chargeable to excise duty.
16. In its submissions dated 3rd June 2025, filed before the appellant filed its submissions, the respondent raised the following five issues for determination:
a. whether the default interest earned by the respondent was excluded from the definition of ‘other fees’ as per the Excise Duty Act during the period 7th November 2019 to 1st July 2021;
b. whether additional interest for late payment of loans is excluded from the meaning of ‘other fees’ and is therefore exempt from excise duty;
c. whether default interest is in the nature of an interest on loan or return on loan rather than a fee, charge or commission charged by a financial institution;
d. whether the tax assessments in relation to September 2018 to February 2019 were time barred; and
e. whether the Tribunal was justified to refer to the definition of interest in the Income Tax Act.
17. In its supplementary submissions dated 15th July 2025 the respondent adopted the issue for determination as raised by the appellant but framed it as whether additional interest for late payment of loans is excluded from the meaning of ‘other fees’ and is therefore exempt from excise duty.
18. The facts of the dispute herein seem straightforward because they are largely not in contention. They revolve around the provisions of Clause 9 in the respondent’s Letter of Offer to its clients or borrowers. I have looked at the two sample Letters of Offer provided by the respondent. Clause 9 in the respondent’s Letter of Offer to its clients provides as follows:
“If the Borrower fails to pay the sum payable under this letter on its due date for payment, the Borrower will (without prejudice to the exercise by the bank of any other rights or remedies in its favour) pay to the bank interest at the rate of 1.25% per month over and above the then subsisting rate of interest payable by the borrower under clause 8 above (the Default Rate) on all monies due with effect from the date of the same becoming due until actual payment of such monies in full (together with accrued interest). The Borrower acknowledges and agrees that the aforesaid rate of interest represents a reasonable pre-estimate of the loss to be suffered by the Bank in funding the default of the Borrower.
Interest payable on the facility will be calculated on the basis of actual days elapsed over a 365-day year. Interest so calculated will be payable monthly in arrears by debit of the Borrower’s current account with the Bank. The Borrower must ensure that interest is service fully at the end of each month. Failure to which interest will be compounded monthly. The Bank however reserves the right to vary the interest rate, at any time and in its absolute and unfettered discretion. A 30-day notice prior to effecting the variation of interest shall be served on the Borrower.”
19. Clause 8 referred to in the caption above is titled “Interest Rate” and provides for various rates of interest chargeable on the various credit accommodations such as Term Loan facility, Overdraft facility and Insurance Premium Finance Line facility provided by the respondent to its customer. These respectively fall under paragraphs (a), (b) and (c) of Clause 8. There is a paragraph (d) which is a replica of the first part of Clause 9 up to the point where it reads “Clause 8 above.” This would mean that either this paragraph (d) is otiose or there was an attempt to remove Clause 9 and place it as a paragraph under Clause 8.
20. Clause 10 provides for Commissions and other charges enumerated in paragraphs (a), (b), and (c), respectively as Processing fee, Invoice Discounted and Supplier Invoice Financed each attracting its own rate of charge. Paragraph (d) under that clause provides that “Commisions and other bank charges will be levied according to the prevailing Bank tariff sheet already provided to the borrower. There are two more commissions under the same paragraph charged on Letter of Credit and Bid Bond and Guarantee.
21. It is apparent from Clause 9 as reproduced above that the respondent charges default interest of 1.25% per month for late payment of the principal amount of loan or other facility by the borrower, over and above the normal rate of interest. Both parties have referred to this extra charge as penal interest.
22. The issue in contention is whether this extra charge is “interest” and therefore not chargeable to excise duty or is a “other fees” and therefore chargeable to excise duty under the Excise Duty Act.
23. The appellants submit that they deduced that when a borrower fails to pay monthly instalments as prescribed in their loan contract a fine or penalty is charged on the monthly repayments due over and above normal interest rates on the principal amounts due. The extra charge is what is classified as penal income. According to the appellant this income is considered as a fee that should be charged excise duty under the Excise Duty Act.
24. The respondent on its part submits that this is simply interest as stated under Clause 9 of its Letter of Offer and cannot be taken to mean “other fees.”
25. Under the Excise Duty Act, the sections that are material and refer to “interest” and “other fees” are as follows:
I. Section 9(6) of the Excise Duty Act which provides that the excisable value of excisable services specified in item 4 of Part II of the First Schedule shall not include interest or an insurance premium.
II. Part II, Paragraph 4 of the First Schedule to the Excise Duty Act which provides that, “excise duty on other fees charged by financial institutions shall be 20% of the excisable value.
III. Part III of the First schedule to the Excise Duty Act which defines "other fees" to include any fees, charges or commissions charged by financial institutions relating to their licensed financial institutions, but does not include interest on loan or return on loan or an insurance premium or premium based or related commissions.
26. To justify its position, the appellant submits that the reference to the “penal income” as “additional interest” by the respondent in Clause 9 of the Letter of Offer is simply meant to “mislead the court” and also describes the same as “hidden charges” equivalent to processing fees, prepayment charges, late payment penalties, penalty interest, documentation charges, insurance charges and loan cancellation fees to which excise duty is chargeable by the appellant.
27. The respondent on its part submits that the appellant’s interpretation of default interest would lead to an absurdity and a defeat of logic. Further that the appellant’s argument that the wording of default interest as ‘additional interest’ is meant to mislead the court is fallacious and has no basis in the English language nor law. Further that whether or not interest is charged on the condition of some future event occurring, or an ongoing event subsisting, does not change its basic meaning. The respondent submits further that the wording of ‘default interest’ is a function of commercial relations and the communication of consequences for failure to repay a loan, rather than a re-categorization of the primary charge or cost charged on a loan.
Analysis
28. For me, the issue turns on the authority from where each party seeks to interpret the default interest under Clause 9 either as “other fees” as contended by the appellant or “interest” as maintained by the respondent.
29. To begin with, both parties are agreed that the plain language or literal meanings of the words “interest” and “other fees” in the Excise Duty Act have to be considered as this is in line with the law on interpretation of tax statutes.
30. Both parties therefore agree to the holding of the Court in the case referred to by the respondent of Cape Brandy Syndicate v I.R Commissioners [1921] 1KB where the Court held that:
“… in a taxing Act one has to look at what was clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”
31. Further in the case of Stanbic Bank Kenya Limited v Kenya Revenue Authority [2009] KECA 427 (KLR) the Court of Appeal, Nyamu, J.A. stated as follows in respect of the use of ordinary meaning of words in a statute:
“In my interpretation of the law, it is quite evident that I have not sought any assistance from outside a dictionary in ordinary use. Moreover, I have not strained the meaning of the words in order to achieve any particular result. I have simply adopted the ordinary meaning of the words used in the relevant tax statute. This is because as regards tax law the issue of intention or intendment does not arise. If there is any ambiguity, and I did not detect any in my analysis, the same must be construed in favour of the tax payer. In tax law, the converse is also true that if the meaning is clear, that tax is chargeable, the issue of what was intended is not the function of the court and where tax liability is expressed and located by law the courts must uphold the taxman’s position.”
32. The appellant submits further that while both penalties and interest are costs associated with borrowing money, interest is the cost of borrowing itself, while penalties are fees charged for failing to meet the terms of the loan agreement. Unfortunately, the appellant does not provide any authority they rely upon to assert that penalty can only be construed as fees and not interest.
33. On its part the respondent submits that the literal wording of the Excise Duty Act excludes interest on loans from the ambit of excise duty. As such, that the Tribunal correctly found that the additional interest on loans is excluded from the meaning of ‘other fees’ and is therefore not subject to excise duty.
34. The respondent submits further that it relies on the ordinary meaning of the word ‘interest’ as used in the definition of ‘other fees’ under paragraph 4 of Part III of the First Schedule to the Excise Duty Act.
35. Further that the Black’s Law Dictionary, 10th Edition 2014 at page 935 defines interest as follows:
“The compensation fixed by agreement or allowed by law for the use or detention of money, or for the loss of money by one who is entitled to its use; especially, the amount owed to a lender in return for the use of borrowed money.”
36. Further, the Oxford Dictionary, 8th Edition defines interest as follows:
“(1) the money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt; and
(2) the extra money that you pay back when you borrow money or that you receive when you invest money; to pay interest on a loan.”
37. The respondent submits further that the literal definition of interest has been upheld in the case of Mwalimu National Sacco Society Ltd v Commissioner of Legal Services and Board Coordination [2024] KETAT 1013 (KLR) where the Court stated that:
“…interest is the compensation paid in consideration of using someone else’s money, or put differently, it is the consideration that is paid for keeping someone out of the use of his money.”
38. Learned counsel further submits that the default interest fits within the definition of return on loan as envisioned in the Excise Duty Act, since the default interest is a constituent of the return that the respondent receives having advanced the loan to its customer.
39. In support of the respondent’s submissions, learned counsel cites the case of Commissioner of Domestic Taxes v Key Microfinance Bank Limited [2023] KEHC 19067 (KLR) where the court agreed with the findings of the Tax Appeals Tribunal that interest charged for late repayment of loans by borrowers is excluded from excise duty.
40. The Court of Appeal emphasized on the strict interpretation of tax statues in the case of Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 others [2019] KECA 500 (KLR) by stating that:
“...when it comes to interpretation of tax legislation, the statute must be looked at using slightly different lenses. With regard to tax legislation, the language imposing the tax must receive a strict construction. Judge Rowlett in his decision in Cape Brandy Syndicate v I.R. Commissioners [1921] 1KB (cited by the appellants), expressed the common law position in this area when he stated;
‘…in a taxing Act one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used'.
(Emphasis ours)
Similar statements have been made in several judgments on tax cases. In Scott v. Russell (Inspector of Taxes), [1948] 2 All ER Lord Simonds expressed:
“… there is a maxim in Income tax law which, though it may sometimes be over-stressed, yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him.”
This common law position is what pertains here and has been adopted by our courts as good law. In our view there cannot be an equitable construction of income tax legislation. The norm is that a taxing legislation must be construed with perfect strictness whether or not such construction is against the State or against the person sought to be taxed. If however there is any real ambiguity in a taxing Act, such ambiguity may be resolved in favour of the taxpayer, or, as it is sometimes stated: contra fiscum. The following excerpt from the renowned author of Bennion on Statutory Interpretation, 5th Edition, summarises the correct position in law as far as interpretation of tax legislation is concerned.
“I find that they cannot tax the applicant twice over Bennion adds: - ‘Nevertheless taxation is clearly “penal” within this section of the Code, and must not be enforced by the courts unless clearly imposed. As Evans LJ said in the context of tax legislation it is necessary to consider the legal analysis with the utmost precision so that the taxpayer shall not become liable to tax unless this is clearly and unequivocally the object of the statutory provisions ... The Courts are reluctant to adopt a construction permitting a person’s tax liability to be fixed by administrative discretion….’ This is how this court has regarded the assessment of tax on an arbitrary input-output formulae because it is not supported by any law nor is its retroactivity permitted by law…The same principles as above, were accepted and applied in the case of Cape Brandy Syndicate vs. Inland Revenue Commissioners [1921] KB 64 where Ronlat J, restated the principle in these words: ‘in a taxing Act clear words are necessary in order to tax the subject. Too wide and fanciful a construction is often to be given to that maxim, which does not mean that words are to be unduly restricted against the Crown or that there is to be any discrimination against the crown in those Acts. It simply means that in a taxing Act one has to look merely at what is clearly said. There is no reason for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look fairly on the language used.’… Again, in the case of Ramsay Ltd vs. Inland Revenue Commissioner [1992] AC 300 the same principles were expressed as follows:- ‘A subject is only to be taxed on clear words not upon intendment, or upon the “equity” of an Act’. Any taxing Act of Parliament as to be construed in accordance with this principle.” (Emphasis supplied by the Court of Appeal)
41. In tax law, the onus is upon the tax payer to prove that it is not liable to pay the tax as assessed by the tax authority. In Primarosa Flowers Limited v Commissioner of Domestic Taxes [2019] KEHC 9431 (KLR) the High Court stated as follows:
“I find the Appellant has not discharged the burden of proof to the required standard of proof. In Mulherin vs Respondent of Taxation [2013] FCAFC 115 the Federal Court of Australia held that in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”
42. From the facts of the case presented before the TAT and the submissions above by learned counsel for the respondent, it is apparent that in maintaining that the default interest cannot be construed to mean “other fees,” the respondent relies on the authority of the Excise Duty Act itself calling for the strict interpretation of the provisions.
43. Both parties are agreed with the definition as provided for in the Black’ s Law Dictionary (confirm this) that interest is the compensation for temporarily parting with your funds or charges for borrowing money. See also Commissioner of Domestic Taxes v/s Stima Sacco (E090 of 2021).
44. The appellant has cited the case of National Bank of Kenya Ltd v Commissioner of Domestic Taxes [2022] KEHC 10549 (KLR)
“A strict interpretation of the Finance Act, 2013 meant that all fees incidental to obtaining a loan would be subjected to Excise Duty while the interest earned from the loan would be exempted.
There are various fees associated with acquiring a loan and they include commitment fees, appraisal fees, front-end fees, arrangement fees, loan administration fees and many other fees and charges that lenders charge when lending. These are distinguishable from interest as they are only costs incidental to the loan while interest is the main consideration that is charged for the loan. The rest are only expenses incurred in obtaining the loan.
Accordingly, the Tribunal erred when it held that commitment and appraisal fees are part of interest and are exempt from Excise Duty. Obviously, these fees are just but expenses and not interest and are therefore not exempt from Excise Duty.”
45. Further, in Commissioner of Domestic Taxes v Sidian Bank Limited [2023] KEHC 18382 (KLR) the High Court stated that:
“While I agree with the Respondent that the credit card services offered by the Respondent to its customers may be termed as a ‘soft loan’, a plain and literal interpretation of the term “interest” above can only lead to the conclusion that all fees incidental to obtaining such a ‘loan’ such as cash advance/balance transfer/commitment/facilitation/ processing fees among others would be subjected to Excise Duty while the interest earned from using the said credit card would be exempted. I therefore agree with the Commissioner that the Tribunal erred in its findings that all the fees and charges earned by the Respondent from the credit card transactions were akin to interest and therefore non-excisable. This ground of appeal by the Commissioner therefore succeeds.”
46. My understanding of these statements does not indicate at all that the default interest charged by the bank for a customer defaulting on loan repayment is included in what the court called “all fees incidental to obtaining such a loan” and as followed by the enumerated items which are subject to excise duty. It is in fact notable that the court in those cases did not include extra interest as part of the enumerated items which fell under fees and were subject to excise duty.
47. The appellant contents that the TAT erred in making reference to the Income Tax Act in defining the word interest. I do not think it matters much. Given the strict interpretation of tax statutes so as to give the provisions their plain and literal meaning I would not have found it necessary to resort to the defining of interest as provided for under the Income Tax Act. However, this issue has received judicial consideration in several cases. In Commissioner of Domestic Taxes v Barclays Bank of Kenya Limited (Now ABSA Bank Kenya PLC) [2023] KEHC 24807 (KLR) and Commissioner of Domestic Taxes v Barclays Bank of Kenya Limited (Now ABSA Bank Kenya PLC) [2023] KEHC 24807 (KLR), where the High Court, E. C. Mwita, J. (as he then was) agreed with TAT that the Income Tax Act is closely related with Excise Duty Act and the definition of interest in the former Act could be used in the latter Act. Consequently I find that the Tax Appeals Tribunal did not err by inferring to the definition of interest in Income Tax Act since the two Acts are pari materia.
48. In the case of Commissioner of Domestic Taxes v Barclays Bank of Kenya Limited (Now ABSA Bank Kenya PLC) [2023] KEHC 24807 (KLR) the High Court considered this issue thus:
“...that the definition of interest is not limited to numerical percentage rates only but encompasses other charges. In that regard, credit related charges including late payment interest, facilitation fee and processing charges fall within the definition of interest and are therefore exempt from excise duty.”
Determination
49. The appellant makes the following sweeping submissions to support its position, but unfortunately without offering any legal grounding for them:
12. The penalty charged by the bank to the borrower is therefore classified as penal income which falls under other fee.
13. The Appellant further notes in the contracts provided by the Respondent, referred the penal income as additional interest. This position was simply meant to mislead the court. The charge of penalty is not a charge of additional interest.
14. That by definition as in the Black's Law Dictionary it is clear that at no point can a penalty become interest payment as the two are completely different and independent of each other.
15. Interest can be defined as the compensation for temporarily parting with your funds or charges for borrowing money.
16. In the case of Commissioner of Domestic Taxes v/s Stima Sacco (E090 of 2021) Interest was defined as consideration payable for keeping one away from his money or for using someone else’s money.
17. It is also worth noting that ‘Interest’ aside there are other hidden charges applicable to the borrower. Such charges include processing fees, prepayment charges, late payment penalties, penalty interest, documentation charges, insurance charges and loan cancellation fees.
18. While both penalties and interest are costs associated with borrowing money, interest is the cost of borrowing itself, while penalties are fees charged for failing to meet the terms of the loan agreement.
19. Penalty interest as worded by Salaam Microfinance bank is therefore part of other hidden charges and not interest. Other terms used interchangeably with the word penalty interest includes default charge, penal charge, late payment fees and late payment interest.
50. From the foregoing excerpt the appellant would need to justify for instance why “penal income” should be classified as “other fees” and not “interest” as stated in the Letter of Offer. The contention that it was provided for as such simply to mislead the court and also that “at no point can a penalty become interest payment as the two are completely different and independent of each other” have no foundation other than being the writer’s views. The definition of interest in the Black's Law Dictionary as cited by the appellant as “the compensation for temporarily parting with your funds or charges for borrowing money” does not really provide as the appellant submits that a penalty cannot in any way be considered as interest.
51. The issue however is not whether the default interest is a penalty or not. I think the respondent
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