Executive summary

The Kenya Tax Appeals Tribunal (TAT or Tribunal) held, in a 27 November 2025 decision, that because a Savings and Credit Cooperative Organization (SACCO) admits corporate members such as groups, churches, schools or Community Based Organizations (CBOs), it should be classified as a mix of a primary cooperative society and designated cooperative society. Therefore, it is required to separate income derived from individuals and corporate members. The Tribunal held that SACCOs with individual and corporate members should be taxed based on the source of their income — specifically, income earned from individual members should be taxed under section 19A(4) of the Income Tax Act (ITA), and income arising from corporate members should be taxed under section 19A(2) of the ITA.

Detailed discussion

Background

Invest & Grow SACCO (Appellant or the SACCO), a savings and credit cooperative society licensed by the SACCO Societies Regulatory Authority (SASRA) was subjected to a tax compliance audit by the Commissioner of Domestic Taxes covering the years 2018 to 2022. Following the audit, the Commissioner issued additional assessments amounting to approximately 1.69 billion Kenyan shillings (KES1.69b) of corporate income tax, Pay As You Earn (PAYE) and withholding tax. The SACCO lodged an objection, which the Commissioner largely disallowed in an objection decision dated 8 August 2024. The Commissioner initiated recovery measures, prompting the SACCO to file an appeal before the TAT challenging both the legality and substance of the assessments.

Appellant 's case

The Appellant asserted that the additional assessments were unlawful, excessive and procedurally unfair. The Appellant maintained that it was a designated primary cooperative society within the meaning of section 19A of the ITA because its membership was overwhelmingly composed of individual persons, and the few CBOs, churches and schools that the Commissioner had identified as merely vehicles through which individuals participated or had been admitted in a representative capacity. The Appellant contended that reclassification based on negligible nonindividual membership defeated the legislative intent of promoting savings and lending among individuals and offended the principles of strict interpretation of tax statutes and fairness under Article 47 of the Constitution. The Appellant further submitted that the Commissioner had erred in disallowing legitimate business expenses incurred wholly and exclusively in the production of income, contrary to Sections 15 and 16 of the ITA.

Commissioner's case

The Commissioner argued that the Appellant had been correctly reclassified as a designated Cooperative Society because its membership included nonindividual entities such as groups, CBOs, churches and schools, which expressly disqualified it from being a primary society under section 19A (7) of the ITA. The Commissioner maintained that the Appellant had failed to provide registration forms or documentary evidence to support its claim that these entities were merely joint or representative accounts, thereby justifying taxation under section 19A (2) of the ITA.

The Commissioner further contended that the disallowed expenses were either unsupported, unreasonable, excessive, capital in nature or inconsistent with the Appellant's records, and that it had failed to provide primary documents or reconciliations to substantiate them. The Commissioner argued that allowances paid to staff and board members constituted taxable benefits subject to PAYE, and that once reclassified, dividends became non-qualifying and were properly subjected to withholding tax.

TAT's ruling

The Tribunal held that a portion of the assessments was statutorily time-barred, as the Commissioner could only assess taxes retrospectively for five years in the absence of fraud, willful neglect or evasion. Consequently, assessments relating to corporate income tax for 2018 and PAYE and withholding tax for the period "January 2019 to 19 May 2019" were expunged on that basis.

On classification, the Tribunal found that the SACCO did not strictly qualify as a primary society due to the presence of nonindividual members but rejected a blanket reclassification approach. It held that the SACCO had mixed income streams and directed that income from individual members be taxed under section 19A (4), while income attributable to nonindividual members be taxed under section 19A (2) of the ITA. The Tribunal upheld the Commissioner's disallowance of unsupported expenses and found that the Appellant had not fully discharged its burden of proof. As a result, the Objection Decision was varied, and the appeal partially allowed.

Implications

This ruling underscores the importance of strict compliance with membership requirements for SACCOs seeking preferential tax treatment under section 19A (4) of the ITA. Even minimal corporate membership can affect tax classification and necessitate differentiated tax treatment of income streams. The ruling also reinforces the taxpayer's evidentiary burden in tax disputes, emphasizing the need for proper primary documentation to support expense deductions. Additionally, the ruling affirms the statutory limitation period for tax assessments and serves as a reminder that the Commissioner must act within prescribed timelines, unless exceptional circumstances are established by the revenue authority.