[2024] KETAT 536 (KLR)

Asvin v Commissioner of Domestic Taxes (Tax Appeal E517 of 2023) [2024] KETAT 536 (KLR) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 536 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E517 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & T Vikiru, Members

April 26, 2024

Between

Kumar Haria Asvin

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is an adult citizen of the Republic of Kenya residing in Nairobi. The Appellant is a shareholder of Harleys Limited a company registered in Kenya and whose operations are all through the East African region.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. On 30th December 2022 three shareholders of Harleys Limited transferred their shares in Harleys Limited to Westlands Heights Limited, whereupon they filed Capital Gains Tax (CGT) returns and made payment on the same day 30th December 2022 at a rate of 5%.

4. On 20th June 2023 the Respondent issued the Appellant with an assessment order of Kshs. 247,217,628. 00 for Capital Gains Tax. The Appellant objected to the assessment via a letter dated 23rd June 2023.

5. The Respondent issued an objection decision on 27th July 2023 confirming the assessment.

6. The Appellant, being dissatisfied with Respondent’s objection decision dated 27th July 2023 filed this Appeal at the Tribunal on 9th August 2023.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated and filed on 25th August 2023: -i.That the Respondent failed to appreciate that the subject transfer was not undertaken in the year 2023 but rather in the year 2022 when the rate of Capital Gains Tax (hereinafter "CGT'') applicable was 5% and not 15% as alleged in the impugned assessment.ii.That the Respondent erred in law and in fact in failing to appreciate the cardinal principal in law that, the law does not apply in retrospect.iii.That the Respondent erred in law and in fact in averring that the Respondent could on one hand receive monies in one year but impose taxes as per the rate of the subsequent year. It is not only unlawful but also unconstitutional and unreasonable.iv.That the Respondent erred in law and in fact in failing to appreciate that the tax regime in place at the time of the transaction is self-declaratory in nature and taxes are due at the point of self-assessment by a taxpayer and payment to the Respondent.v.That the Respondent erred in law and in fact in its interpretation of the Paragraph ll A of the Eighth Schedule of the Income Tax Act, which is inapplicable, as the Appellant made a self-declaration and remitted taxes to the Respondent.vi.That the Respondent erred in law and in fact in failing to appreciate that the Commissioner is required to assess income chargeable to tax expeditiously under Section 73 of the Income Tax Act.vii.That the Respondent erred in law and in fact in making a finding that the date of franking of the transfer deed by the Collector of Stamp duty was commensurate to the 'tax point' for the purposes of CGT whereas taxes were received by the Commissioner prior to the date of franking.viii.That Respondent erred in law and in fact in failing to appreciate that where an appellant lodges documents with a Government entity for a transaction as was the case herein, then any delay by the Government entity in lodging and/or registering the documents cannot be attributed to the Appellant.ix.That the Respondent erred in law and in fact in its interpretation of Section 23 of the Income Tax Act, which is unconstitutional as it, accords unfettered discretion to the Commissioner and obviates any predictability in a tax regime contrary to fair administrative action in tax.x.That the Respondent fell in error by misapprehending the juridical nature of the transaction as well as the doctrine of tax avoidance which resulted in an incorrect calculation of purportedly wrongly assessed CGT.xi.That the impugned tax decision is arbitrary and erroneous, and the Respondent lacks legal or factual basis as the Appellant has duly paid all taxes as required by statute.xii.That the Respondent erred in law and in fact in failing to appreciate the principles in taxation to the effect that tax legislation must be interpreted strictly and any ambiguity in tax ought to be interpreted in favour of the taxpayer.xiii.That the Respondent erred in law and in fact in failing to appreciate that the Appellant did not violate any tax laws and strictly complied with all relevant laws in their computation of CGT.xiv.That the impugned tax decision and impugned assessment violates the Appellant's Constitutional right to transparency, accountability, legitimate expectation, fair administrative action in tax administration, right to protection of law all contrary to Articles 10, 47 and 48 of the Constitution of Kenya.xv.That by purporting to confirm the impugned assessment in the impugned decision the Respondent acted ultra vires its powers in excess of its jurisdiction as ascribed by law.

Appellant’s Case 8. The Appellant’s case is premised on its Statement of Facts dated and filed on 23rd August 2023.

9. The Appellant averred that on or about the year 2021 the company's leadership commenced discussions on its restructuring as a company. That the transaction subsequently crystallized in the opening of a subsequent company.

10. The Appellant averred further that in carrying out the transaction the Appellant self-assessed the various statutory payments, ensured that all the registration documents were lodged with the respective Government agencies and subsequently remitted various statutory payments in compliance with the various laws.

11. That the various payments included stamp duty as well as Capital Gains Tax all of which were remitted by the Appellant on (or before) 30th December 2022 and were duly received by the Respondent on the said date.

12. The Appellant averred that Capital Gains Tax of 5% on the transfer of shares was computed and remitted to the Respondent in December 2022. That however, the Sale was concluded in 2023 when the CGT had changed to 15%.

13. The Appellant averred that on 6th June 2023 the Respondent issued it with a pre-assessment demand notice for the sum of Kshs. 247,217,664 on the assertion that the Capital Gains Tax was payable at the rate of 15% and not 5%.

14. The Appellant posited that the Respondent admitted receiving the CGT payment by 30th December 2022 at the rate of 5% but holds the erroneous position that the acquisition of shares in the company took place in February 2023.

15. The Appellant averred that three shareholders filed CGT returns and made payment on the same day, 3rd December 2022 at the rate of 5%. That however, acquisition of the shares in Westlands Heights took place on 1st February 2023.

16. The Appellant averred that the statutory payments were made in December 2022 well within the lawful timelines. That it is not only unlawful but utterly unfair and contrary to fair administrative action for the Respondent to duly receive and acknowledge taxes on one hand then further assess additional taxes on the Appellant on the premise that the tax already paid was due in a subsequent year.

17. The Appellant averred that the Respondent holds the wrongful presumption that a transfer occurs when property is sold and the tax due date for CGT is upon registration of the transfer instrument in favour of the transferee without bearing in mind that the tax is payable at the point of a self-assessment and declaration by a tax payer.

Appellant’s Prayers 18. The Appellant prayed that the Tribunal:i.Allows this Appealii.Annuls the impugned decision as well as the impugned assessment.iii.Award the cost of this Appeal to the Appellant.

Respondent’s Case 19. The Respondent’s case is premised on its Statement of Facts dated and filed on 23rd September, 2023.

20. The Respondent submitted that on 30th December 2022, three shareholders of Harleys Limited Rupen Haria , Kumar Haria and Nishil Haria transferred their shares in Harleys Limited to Westlands Heights Limited, which is owned by the same three shareholders. That under the provisions of the Income Tax Act, Capital Gains Tax was payable for this transaction.

21. The Respondent submitted that the two shareholders Asvin Haria and Nishil Haria are shareholders of Harleys Limited and Westlands Heights Limited with a shareholding of 47. 5% and 2. 5%, respectively. That the shareholders filed Capital Gains Tax (CGT) returns and made payment on the same day 30th December 2022 at a rate of 5%. That however, the documents were presented to the Collector of stamp duty on 4th January 2023. That further, acquisition of the shares in Westlands Heights took place on 13th February 2023.

22. The Respondent submitted that the sale was concluded in 2023 when the CGT had changed to 15% hence there was a variance of Kshs. 247,217,628. 00 on the CGT payable by the Appellant.

23. The Respondent averred that the transfer deed presented was franked by Collector of stamp duties on 4th January 2023. That the deed can be dated any day but will be considered effected when the above takes place. That the transfer deed was franked in 2023 whereas CGT was paid before the transfer values have were accepted for payment.

24. The Respondent stated that according to the guideline provided by the Deputy Commissioner, Policy and Tax Advisory on Paragraph II of the Eighth Schedule, the tax-point/ due date in relation to CGT is upon registration of the transfer instrument in favor of the transferee. That in the current circumstance the date the transfer deed was franked represents the tax-point for the CGT.

25. The Respondent posited that the Finance Act 2022 amended Section 34(1)(1) of the Income Tax Act to increase the Capital Gains Tax (CGT) payable in Kenya from 5% to 15% w.e.f. 1st January 2023. That on 16th February 2023, Harleys Ltd announced the acquisition of majority stake in IBL Ltd.

26. The Respondent postulated that for the directors to transfer shares from the trading company into the real estate company on 30th December 2022 whereas all other processes were done the following year and subsequently release the shares to a company which is in manufacture and distribution of human medicines did not make sense and only designed to reduce tax liability.

27. The Respondent submitted that this transaction was designed to avoid tax/ reduce liability to tax in contravention of Section 23 of the Income Tax Act which states that;“Where the Respondent is of the opinion that the main purpose or one of the main purposes for which a transaction was effected (whether before or after the passing of this Act) was the avoidance or reduction of liability to tax for any year of income, or that the main benefit which might have been expected to accrue from the transaction in the three years immediately following the completion thereof was the avoidance or reduction of liability to tax, he may, if he determines it to be just and reasonable, direct that such adjustments shall be made as respects liability to tax as he considers appropriate to counteract the avoidance or reduction of liability to tax which could otherwise be effected by the transaction.”

Respondent’s Prayers 28. Respondent prayed that the Tribunal:a.Upholds the Respondent's decision dated 27th July 2023. b.That this Appeal be dismissed with costs to the Respondent as the same is devoid of any merit.

Issues for Determination 29. The Tribunal has carefully considered the pleadings and documentation of both parties and is of the considered view that the issues that call for its determination are:-a.When is the tax point for Capital Gains Taxb.Whether the Respondent was justified in confirming the Capital Gains Tax assessed on the Appellant.

Analysis and Findings 30. Having identified the issues for determination, the Tribunal proceeded to analyse the same as follows:-a)When is the tax point for Capital Gains Tax

31. The Appellant averred that the Respondent held a wrongful presumption that a transfer occurs when property is sold and the tax due date for CGT is upon registration of the transfer instrument in favour of the transferee without bearing in mind that the tax is payable at the point of a self-assessment and declaration by a tax payer.

32. The Appellant submitted that the statutory payments were made in December 2022 well within the lawful timelines. That it is not only unlawful but utterly unfair and contrary to fair administrative action for the Respondent to duly receive and acknowledge taxes on one hand then further assess additional taxes on the Appellant on the premise that the tax already paid was due in a subsequent year

33. On its part, the Respondent in determining the tax point for Capital Gains Tax relied on Section 3(2)(f) of the Income tax Act as read with Paragraph 2 of the Eight Schedule of the Income Tax Act.

34. The Appellant countered the Respondent erred in law and in fact in its interpretation of the Paragraph ll A of the Eighth Schedule of the Income Tax Act, which is inapplicable, as the Appellant made a self-declaration and remitted taxes to the Respondent.

35. Section 3(2)(f) of the Income tax Act provides as follows with regard to charging of tax:“3. Charge of tax1. …………………..2. Subject to this Act, income upon which tax is chargeable under this Act is income in respect of—……………..(f)gains accruing in the circumstances prescribed in, and computed in accordance with, the Eighth Schedule.” (Emphasis added)

36. Paragraph 2 of the Eighth Schedule to the Income tax Act states as follows with regard to the tax point of CGT:“…the income in respect of which capital gains tax is chargeable, is the whole of a gain which accrues to a company or an individual on or after 1 January 2015 on the transfer of property situated in Kenya, whether or not the property was acquired before 1 January 2015. ”

37. The Tribunal is guided by the case of Kenya Bankers Association v Kenya Revenue Authority [2018] eKLR where the court reiterated the position in the case of Petition 39 of 2017 - The Law Society of Kenya vs. The Kenya Revenue Authority and the Attorney General [2017] eKLR where it was held that Capital Gains Tax is due upon registration of the transfer instrument in favour of the transferee.

38. The Tribunal guided by the above provisions of law and case law finds that the tax point for CGT is upon registration of the transfer instrument in favour of the transferee.b)Whether the Respondent was justified in confirming the Capital Gains Tax assessed on the Appellant.

39. The Tribunal having determined that the tax point for Capital Gains Tax is upon registration of the transfer instrument in favour of the transferee, the Tribunal shifted its focus on the dates of the transaction in question.

40. The Appellant stated that the Respondent failed to appreciate that the subject transfer was not undertaken in the year 2023 but rather in the year 2022 when the rate of Capital Gains Tax (hereinafter "CGT'') applicable was 5% and not 15% as alleged in the impugned assessment.

41. It was the Respondent’s position that the transfer deed presented was franked by Collector of stamp duties on 4th January 2023. That the deed can be dated any day but will be considered effected when franking takes place. That the transfer deed was franked in 2023 whereas CGT was paid before the transfer values were accepted for payment.

42. The Tribunal in its analysis of the documents presented confirmed that the deed presented by the Appellant was stamped on 4th January 2023 when the new rate of Capital Gains Tax had come into effect courtesy of the Finance Act 2022.

43. Further from the material presented before the Tribunal was not in contention that the acquisition of the shares in Westlands Heights took place on 13th February 2023.

44. Based on the above, the Tribunal finds that the transfer of ownership took place in 2023 when the effective rate for CGT was 15%, it follows therefore that the Respondent was justified in confirming the CGT assessment upon the Appellant.

Final Decision 45. The upshot of the foregoing is that the Appeal is devoid of merit and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision issued on the 27th July 2023 be and is hereby upheld.c.Each party to bear its own costs.

46. It is so ordered.

DATED and DELIVERED at NAIROBI this 26th Day of April 2024ERIC NYONGESA WAFULACHAIRMANCYNTHIA B. MAYAKA DR. RODNEY O. OLUOCHMEMBER MEMBERABRAHAM K. KIPROTICH TIMOTHY B. VIKIRU MEMBER MEMBER