Misort Africa Ltd v Commissioner of Legal & Board Services (Appeal E527 of 2026) [2026] KETAT 353 (KLR) (18 September 2026) (Judgment)
The Dispute
Misort Africa Ltd is a private company incorporated in Kenya whose principal business is the construction of buildings. In 2009, the Office of the Deputy Prime Minister and Ministry of Finance awarded it a contract to construct a Disaster Data Recovery Centre at Naivasha for Kshs 782,499,814.30.
A dispute arose over the execution and scope of the project. The parties went to arbitration. The arbitrator published an award on 3 August 2021, finding that the Ministry had repudiated the contract. Misort was awarded Kshs 167,748,234 for idle resources, Kshs 3,680,909,970 for loss of profits, Kshs 25,792,371 for retention fees, and Kshs 57,438,038 for arbitration and legal costs — a total of Kshs 3,931,888,613, plus 12% simple interest until payment.
The High Court upheld the award in its entirety. In 2024, the Ministry paid Misort Kshs 700,000,000 as part settlement. Misort declared the payment in its income tax return but offset it with deductions, producing nil taxable income.
KRA issued an additional corporation tax assessment. Misort objected. On 6 March 2026, KRA issued its objection decision confirming corporation tax of Kshs 210,000,000, a penalty of Kshs 10,500,000, and interest of Kshs 12,600,000 — a total of Kshs 233,100,000.
The Appellant’s Argument
Aggrieved, Misort lodged an appeal with the Tax Appeals Tribunal. Its principal argument was that the arbitral award was not automatically taxable income. It contended that the loss of profits was compensation for the termination of the contract itself — a capital receipt, not business income. The idle resources reimbursed costs it had actually incurred. The retention had already been invoiced and recognised as income in prior years, so taxing it again would be double taxation. The legal costs were reimbursements of expenses. And the interest had not been ascertained or paid, so it could not be taxed.
Misort further argued that no charging provision in the Income Tax Act brought a capital receipt of this nature within the tax net. It relied on the surrogatum principle — that compensation takes the character of what it replaces — but argued that KRA had misidentified what the award replaced.
KRA’s Defence
KRA mounted a robust defence of its assessment. It stated that it had analysed the contract and the arbitral award and found that the award comprised several chargeable components. Idle resources and loss of profits were chargeable as business income. Retention fees were chargeable as business income. Arbitration and legal costs were chargeable to the extent previously deducted. Interest was chargeable as interest income.
KRA relied on the surrogatum principle, arguing that compensation for loss of profits represents the profits the business would have earned had the contract been performed, and such compensation assumes the character of business profits. It also relied on the Court of Appeal decision in Commissioner of Domestic Taxes v Delmonte Kenya Ltd, which reinforced that the commercial reality and substance of a transaction dictate its tax outcome.
KRA maintained that the Appellant had failed to discharge the burden of proof under Section 56(1) of the Tax Procedures Act, 2015, by not providing documentation and evidence countering the additional assessment.
The Decision
The Tribunal allowed the appeal. It held that an arbitral award is not chargeable to tax merely because it is embodied in a court judgment. The correct question is what each sum replaced.
On loss of profits (Kshs 3,680,909,970), the Tribunal found the award compensated Misort for the extinguishment of its contractual rights — the profit-making structure itself — and not for profits earned in the carrying on of a business. The receipt was capital in nature and fell outside Section 3(2)(a)(i) of the Income Tax Act.
On idle resources (Kshs 167,748,234), the Tribunal found the sum reimbursed expenditure occasioned by the repudiation. It was not a replacement of trading receipts.
On arbitration and legal costs (Kshs 57,438,038), the Tribunal noted that KRA accepted a charge arises only to the extent the expenditure had previously been deducted. No such deduction was shown. The charge failed.
On retention (Kshs 25,792,371.55), the Tribunal held that retention money is deferred payment for work already performed and invoiced. The income had already accrued in the year the Phase 1 works were recognised. Taxing it again on release would be double taxation.
On interest, the Tribunal held that KRA’s determination was premature. The interest had neither been ascertained nor paid. KRA could assess it later, when it accrued or was received in a proper year of income.
The Tribunal also found that Misort had discharged its burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act. It had produced the contract, the arbitral award, the High Court decision, the objection correspondence, and the objection decision.
The Appeal was allowed. The Respondent’s Objection Decision dated 6 March 2026 was set aside. Each party was ordered to bear its own costs.
