The Commissioner of Domestic Taxes v Delmonte Kenya Limited
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
#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
- 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
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "The Commissioner of Domestic Taxes v Delmonte Kenya Limited", 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.