Tile and carpet centre deposited money with its advocates for the purpose of buying land for its sister company Tile & Carpet Centre development Ltd. The money was later refunded by the advocates. The commissioner contended that this money had been borrowed from a credit facility and the interest therein claimed as an expense. The commissioner disallowed the interest expense to the extent of the money deposited with the advocates and raised an additional assessment.
The commissioner’s basis for disallowing the interest expense was Section 16(1) (a) of ITA, which disallows expenditure not incurred wholly and exclusively for production of income. The company was borrowing money to finance its working capital while it was in a position to lend money to a sister company for purposes of acquiring land, so the money it had borrowed was not available for generating income. The courts were able to establish that the money deposited with the advocates came from the overdrafts account. The high court judge ruled that The Commissioner was entitled to disallow the interest expense under section 16(1) (a) of the ITA.
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http://kenyalaw.org/caselaw/cases/view/192810