The Kenya Revenue Authority (KRA) has suffered a significant legal defeat after the Tax Appeals Tribunal ruled in favour of the Automobile Association of Kenya (commonly known as AA Kenya), overturning a tax demand totaling approximately Ksh27.2 million.
The tribunal’s decision, rendered in early 2024, hinged on the interpretation of income tax exemptions applicable to a members‑based club, ultimately determining that AA Kenya did not fall within the statutory definition of an exempt entity under Section 21 of the Income Tax Act.
The dispute began following a KRA verification exercise that reviewed AA Kenya’s financial records spanning the 2016 to 2020 fiscal years. KRA concluded that AA Kenya had under‑declared income totaling KSh20.28 million.
The tax agency added penalties and interest Ksh1.01 million and Ksh5.87 million respectively bringing total assessed liability to Ksh27,165,407.
KRA asserted that AA Kenya did not qualify for exemption under Section 21 of the Income Tax Act because over half of its revenue came from non‑members a driver training programme for persons not registered as members. KRA argued that this income disqualified the association from being considered a tax‑exempt member club under the law.
AA Kenya challenged the assessment, filing an objection on 22 July 2022 and later escalating to the Tax Appeals Tribunal. The organisation maintained that it was indeed a bona fide members’ club with legal entitlement to exemption, pointing to its registration, constitution, membership proof, and invoicing practices.
The tribunal scrutinised the income streams and determined that AA Kenya derived more than the minimum threshold of revenue from bona fide members, thus qualifying under Section 21(1) of the Income Tax Act.
Relying on established jurisprudence particularly the judicial principle that tax laws must be applied strictly and not by implication the tribunal ruled that KRA failed to meet the burden of proof to disqualify AA Kenya from exemption.
The judgment referenced precedent stressing that if a taxpayer falls within the literal wording of a tax‑exempt provision, disregarding hardship, the exemption must apply.
The outcome marks a setback for KRA at a time when the authority is contending with more than Ksh313 billion in tax demands currently in dispute before courts and tribunals a growing challenge undermining its revenue collection capacity.
The AA Kenya ruling is notable for reinforcing procedural fairness and strict statutory interpretation in tax administration, particularly for entities operating on a membership model.
As a result, KRA is barred from pursuing the assessed amounts, including interest and penalties, while the taxpayer is absolved of the entire Ksh27.2 million demand.
The ruling also underscores the importance for KRA to ensure rigorous verification and legal grounding during assessments to avoid reversals under appeal, and sets a precedent for similar clubs seeking to preserve their tax-exempt status under the law.
Written By Ian Maleve
