Commissioner of Domestic Taxes v Delmonte Kenya Ltd (Civil Appeal E174 of 2022) [2026] KECA 1125 (KLR)
The bottom line
#Kenya's Court of Appeal confirmed that companies can deduct foreign exchange losses from converting debt to equity, even when those losses look capital in nature.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.Whether the foreign exchange losses incurred through conversion of debt to equity were an allowable deduction
- 2.Whether the loss incurred in converting the debt to equity is capital or revenue in nature
Key legal issues
#Whether the foreign exchange losses arising on conversion of debt to equity were capital or revenue in nature
The losses were of a revenue nature; they arose from the value of loans used to finance day-to-day operations and were realized when the loans were extinguished, not on issuance of the shares.
The accumulated foreign exchange losses arose from translating outstanding loan balances year on year; the loans financed suppliers, raw materials and salaries. The shares were issued in Kenya Shillings and could not themselves generate foreign exchange losses. Conversion of the loans into equity extinguished the liability, which under section 4A amounted to realization of a deductible foreign exchange loss in that year of income. The High Court's finding to that effect was upheld as it was not contrary to law.
Whether section 4A of the Income Tax Act permits deduction of foreign exchange losses realized through debt-to-equity conversion notwithstanding section 16(1)(b) on capital expenditure
Yes. Section 4A makes no distinction between capital and revenue realization, and by its 'save as otherwise expressly provided' wording section 4A prevails over section 16; the disallowance could not be implied.
Applying the strict construction principle, the Court rejected the Commissioner's invitation to disallow the loss by implication. Section 4A covers any foreign exchange loss realized in a business on or after 1st January 1989 without qualifying the manner of realization. Since tax cannot be imposed by implication, and the Act expressly provides for deductibility of realized foreign exchange losses, section 16(1)(b) did not bar the deduction. Statutory intervention would be needed to alter this position.
The correct principle for interpretation of tax legislation
Tax statutes are construed strictly on their literal words; nothing is implied or read in, and ambiguity favours the taxpayer, in line with Cape Brandy Syndicate and the constitutional guarantee under Article 210(1).
The Court adopted the Supreme Court's restatement in Barclays Bank that no tax may be imposed, waived or varied except as provided by legislation, and that the taxing authority cannot act on implication or conjecture. Citing Cape Brandy Syndicate, the Court held there is no equity or intendment in a tax; only the clear language of the statute is looked at. This principle disposed of the Commissioner's argument that section 4A must be read with sections 3(2)(a)(i), 15 and 16 to imply a disallowance.
Legal principles established
#- Tax legislation must be interpreted strictly according to its literal meaning; tax cannot be imposed by implication and ambiguity is resolved in favour of the taxpayer.
- Under section 4A of the Income Tax Act, a foreign exchange loss is realized not only when debt is paid in cash but also when it is extinguished by payment in kind, conversion of debt to equity, or amortization against receivables, and the mode of realization (capital or revenue) is immaterial to deductibility.
- Section 4A of the Income Tax Act prevails over section 16 by virtue of the words 'save as otherwise expressly provided', and makes no distinction between revenue and capital realization of foreign exchange gains or losses.
- On a second appeal, the Court of Appeal's role is limited to matters of law and it will not interfere with the High Court's decision absent an error of law, misapplication of a statutory provision or misinterpretation of a legal principle.
Court orders
#- 1.The appeal is dismissed
- 2.The judgment and orders of the High Court are upheld
- 3.The appellant shall pay the costs of the appeal
The bench
#One judgment of the whole court — no separate or dissenting opinions.
Wrote the judgment
Wrote the judgment
Wrote the judgment
- On appeal from
- High Court of Kenya
- Appeal from Tax Appeals Tribunal Tax Appeal No. TAT/81 of 2015 (Delmonte Kenya Limited vs. The Commissioner of Domestic Taxes)
- Jurisdiction invoked
- Second appeal to the Court of Appeal on matters of law only, in accordance with the Court's appellate jurisdiction over High Court decisions
Relief refused
#Setting aside the High Court judgment and confirming the amended assessment of Kshs. 270,661,566.00 against the respondent
The Court found the foreign exchange losses were of a revenue nature and deductible under section 4A of the Income Tax Act, which prevails over section 16 under its express wording
Costs
The appeal was dismissed with costs to the respondent; the Court stated: 'In conclusion, we uphold the judgment and orders of the High Court and dismiss this appeal with costs.' (Note: the High Court below had ordered that costs there and before the Tribunal be borne by each party.)
Quotable passages
#Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.
In conclusion, we uphold the judgment and orders of the High Court and dismiss this appeal with costs.
we accept that tax legislation must be interpreted using the strict construction principle by which focus is on the literal meaning of the statute. The principle is that tax cannot be imposed by implication and in event of any ambiguity, the same is to be decided in favour of the taxpayer.
realization of the loan does not only occur when the debt is paid in cash but it is also possible for a debt to be extinguished through payment in kind or exchange of goods and services, conversion of debt to equity or even amortization against receivables between parties- as was the case in the present dispute.
the words "save as otherwise expressly provided…." in section 16 means that section 4A of the Act, in any event, prevails over the provisions of section 16.
We find that section 4A was the express provision of the Act governing taxation of income from businesses where foreign exchange loss or gain is realized. The method or mode of realization, capital or revenue, appears immaterial in the wording of section 4A of the Act.
Issues in the judgment
#The judgment's opening paragraph describes an appeal to the High Court by 'the respondent' and the TAT judgment, but the same parties are elsewhere described with the Commissioner as appellant before this Court; the roles are internally consistent on close reading but the repeated references to the respondent as appellant in the TAT and High Court require care when tracing the procedural history.
The judgment states the hearing took place on 3rd March 2026 while delivery was on 12th June 2026; no contradiction, but the figure 'Kshs.270,661,566.00' in the appellant's prayer does not match the sum of the additional taxes stated (Kshs. 60,828,537 and Kshs. 161,481,213 plus the disallowed loss), and the loan figure appears variously as USD 28,255,616, USD 28, 251, 615.62 and USD 28,256,615.62 within the judgment.
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Commissioner of Domestic Taxes v Delmonte Kenya Ltd (Civil Appeal E174 of 2022) [2026] KECA 1125 (KLR)", Case Analysis (2026). Court of Appeal Appeal (memorandum dated 31st March 2022) from High Court judgment of 20th December 2019; originating from Tax Appeal No. TAT/81 of 2015. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1125/eng@2026-06-12
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.