[2024] KETAT 115 (KLR)

Automobile Association of Kenya v Commissioner of Domestic Taxes (Tax Appeal 1263 of 2022) [2024] KETAT 115 (KLR) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 115 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1263 of 2022

RM Mutuma, Chair, BK Terer, EN Njeru, M Makau & W Ongeti, Members

February 2, 2024

Between

Automobile Association of Kenya

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. Automobile Association of Kenya (“Appellant”) was founded in 1919 and was registered in Kenya as an association in 1993 to promote and safeguard the interests of its members who are mostly motorists; the Appellant also provides valuation services, maintenance and repair of vehicles, road mapping, technical training to its members, towing services, rescue services, driving classes among other services to its members.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. The Kenya Revenue Authority, KRA, is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent conducted a verification exercise on the Appellant’s operations covering the financial years 2016 to 2020 which resulted in the Respondent issuing Corporate Income Tax (CIT) assessment amounting to Kshs. 27,165,407. 00.

4. Additional assessment was issued to the Appellant on 24th June, 2022 on the basis that it did not qualify to be a members’ club under Section 21 (1) of the Income Tax Act because more than 50% of its gross income was derived from driving school learners who did not qualify to be members as provided for under Section 21 (3) of the Income Tax Act. The Appellant objected to the Respondent's assessment vide a letter dated 22nd July 2022.

5. The Respondent confirmed the assessment through its objection decision dated 16th September 2022 on the basis that a section of the Appellant’s members i.e. learners do not qualify to be members as defined under Section 21 (3) of the Income Tax Act.

6. Dissatisfied with the Respondent’s objection decision, the Appellant filed an Appeal at the Tax Appeals Tribunal on 13th October 2022.

The Appeal 7. The grounds of the Appeal are outlined in the Memorandum of Appeal dated 26th October 2022 and are summarized as hereunder:a.That the Respondent erred in assessing CIT on the Appellant on the ground that the Appellant's income is not exempt from CIT in accordance with Section 21 of the Income Tax Act (ITA) and that Sections 15 and 16 of the Income Tax Act apply to the Appellant.b.The Respondent erred in assessing CIT on the Appellant's income for the financial years (FYS) 2016 to 2020 on the ground that some of Appellant's genuine members failed to meet the threshold of a ‘member’ as defined under Section 21 (3) of the Income Tax Act.c.That the Respondent erred in assessing CIT on the Appellant’s income on the basis that more than 50% of the Appellant’s gross receipts were derived from non-members (learners who are not members).d.The Respondent erred in concluding that the Appellant is not a registered member's club pursuant to the provisions of Section 21(3) of the Income Tax Act.

The Appellant’s Case 8. The Appellant set down its case as follows: -a)The Statement of Facts dated 26th October 2022 and filed on the even date; andb)The written submission of 3rd February 2023 and filed on the same date.

9. The Appellant stated that, the Respondent conducted a verification exercise on the Appellant's operations covering the financial years (FYs) 2016 to 2020 which resulted in the Respondent issuing Income Tax (CIT) assessment communicated to the Appellant vide the letter dated 24th June 2022. The assessment amounted to Kshs. 27,165,407. 00 comprising of principal tax of Kshs. 20,284,062. 00, penalty of Kshs. 1,014,203. 00 and interest of Kshs. 5,867,142. 00

10. The aforementioned assessments relate to the Respondent’s decision to charge CIT on the Appellant’s income which the Respondent averred does qualify for CIT exemption because more than 50% of the income is derived from driving school learners (“learners”) who do not qualify to be members in accordance with Section 21(3) of the Income Tax Act.

11. The Appellant objected to the Respondent's tax assessment vide the letter dated 22nd July 2022.

12. It stated that, the Respondent relied on documents availed by the Appellant which include the operating constitution, registration documents, sample membership access cards, sample membership application form and sample invoices.

13. The Appellant contended that a member's club which derives more than 75% of its gross income from members is not subject to CIT under the provisions of Section 21 (1) of the Income Tax Act. The Appellant opined that the Respondent’s assertions in the objection decision are irrelevant and are merely opinions with no legal basis on Section 21 of the Income Tax Act.

14. That in the case of Republic vs. Commissioner of Domestic Taxes Large Tax Payer’s Office Ex- Parte Barclays Bank of Kenya Ltd [2012] the court cited the case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] as follows:“... In a taxing Act one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing IS it to be implied. One can only look fairly at the language used... If a person sought to be taxed comes within the letter of the law he must be taxed. However great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free however apparently within the spirit of the law the case might otherwise appear to be.”

15. The Appellant stated that the word “entitled” as used under Section 21 (3) of the Act is not defined in the Income Tax Act or any other tax statute and therefore creates uncertainty on applicability of the said provision. The uncertainly is further compounded by the fact that the primary yardstick to a member in a member's club under Section 21 (3) of the Income Tax Act is that the said member must be entitled to the interest of all assets of that club in the event of its liquidation, no clarity is provided beyond that. The provision is open to interpretation of both the Appellant and the Respondent, a classic example is a statute producing “artificial” result.

16. Foremost, despite the word ‘entitled’ being used on several occasions in the Income Tax Act, there is no attempt to elaborate or assign meaning to it, even on issue as significant as income tax exemption on member’s club and societies under Section 21 of the ITA. In legal sense, “to entitle’’ is to give a right or title. Therefore, a person is said to be entitled to property when he has a right to it. (Com. vs. Moorhead. 7 Pa. Co. Ct. R. 510; Thompson v. Thompson, 107 Ala. 103. 18 South. 247). The question the Appellant puts before the Tribunal is whether its learners have a right to the interest of the Appellant's assets and who determines the said right pursuant the above provisions, in addition, there is no test of percentage of claim (right) which qualifies a person to be a member of the club. It matters not whether the percentage of claim on the interest is 0. 0001%. That too is a right, an entitlement.

17. The Appellant opined that any right, material or immaterial, significant or insignificant, where granted to its members on properties is reasonable and falls in the purview of “entitlement” under Section 21 of the Income Tax Act.

18. That Section 21 (3) of the Income Tax Act then imposes an event or possibility of an event liquidation as a condition to determine “entitlement”. A club or association shall determine its members in the occurrence or presumption of liquidation (henceforth, “liquidation” herein also means the presumed occurrence of liquidation). The Appellant contended that the entire membership under Section 21 (3) is inclined to their entitlement at liquidation. It is only at that point of liquidation that a member's right to the interest will crystalize.

19. According to the Appellant, the provisions of 21 (3) of the Income Tax Act does not arrogate to the Commissioner rights in excess of those conferred upon him under the law. The fact that the said provision is tied at the hip to liquidation indicate that “entitlement” and by extension membership of the Appellant is a prerogative a function of the Appellant's contributories and creditors on instruction of a competent court as clearly stipulated under the provisions of Sections 454 and 455 of the Insolvency Act, 2015. Put differently, the Respondent's actions to “reclassify” members to be “non-members” is usurpation of judicial authority to establish and determine who has rights, adjustment to those rights and extent of those rights.

20. That upon liquidation, the Insolvency Act 2015 and more specifically Sections 454 and 455 override any written law with respect member's entitlement/rights as stated below:-“454 Court to adjust rights of contributories -The Court shall adjust the rights of the contributories among themselves and distribute any surplus among the persons entitled to it.455 Power of the Court to make orders enabling creditors and contributories to inspect company’s records(1)At any time after making a liquidation order, the Court may make such order for inspection of the company's records by creditors and contributories as the Court considers appropriate.(2)The creditors and contributories of the company are entitled to inspect all records in the company's possessions or under its control, but except as provided by or under the authority of any other written law, no other persons are entitled to inspect those records”

21. From the foregoing, the Appellant stated that there is no provision in the Income Tax Act or any other written law that authorises the Respondent to inspect the accounts of the Appellant and determine whether its members are entitled to its assets in the event of liquidation.

22. Further, the Appellant stated that a member’s club gross income is exempt from CIT where more than 75% of the gross income is derived from its members. However, the members are only classified so when they are entitled to the interest in the event of liquidation. If a liquidation order were to be granted today, a competent Court would instruct the association’s creditors and contributories to inspect the records of the association with view to establish among other things, ‘entitlements’ and the Court will adjust any rights (read entitlement) of the contributories accordingly.

23. Consequently, the Appellant stated that actions of the Respondent to reclassify its members on mere opinions and conclude that some members are not entitled to the interest of the association is unlawful.

24. The Appellant stated that there are no Guidelines, Regulations or any Public Notice issued by the Respondent to aid taxpayers in compliance with the provisions of Section 21 of the Income Tax Act. The interpretation of the “entitlement” should be restricted to the clear wording of the provision, and since the statute provides no more than a mention of the word, the Appellant is legally bound to interpret the provision as it understands it, recruit its members and establish entitlement in accordance with its operating constitution and rules set by its Governing Council.

25. The Appellant stated that the Respondent has no legal basis to impose, infer or establish whether members of the Appellant are entitled to assets of the association outside the Insolvency Act, 2015. The ambiguity created by Section 21 (3) serves against the principle of public interest on account that the income tax exemption granted to associations and societies is solely dependent on their status to the welfare of its members. The Appellant should not bear the tax burden for the Respondent's negligence because Guidelines or public notices have been provided by the Respondent with respect to Income tax exemptions under Paragraph 10 of the First Schedule to the Income Tax Act and Section 13 of the Income Tax Act.

26. The Appellant relied on the sound judgement in Unilever Kenya Ltd vs. Commissioner of Income Tax [2005] eKLR, where the learned judge held;-“I am, therefore, unable to accept the argument that in view of the alleged clear wording of Section 18 (3) of the Act, no guidelines are necessary here in Kenya. That is rather simplistic, and devoid of logic...And especially because of the absence of any such guidelines in Kenya, we must look elsewhere.’’

27. The Appellant also stated that this position is solidified further in the case of, Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others in which the court held: -“taxation can only be done on clear words and cannot be on intendment... even where the inclination of the legislature is not clear or where there are two or more possible meanings, the inclination of the court should be against a construction or interpretation which imposes a burden, tax or duty on the subject.”

28. That in as far as the Appellant has members whom it deems to be entitled to interest in its assets, those members are valid members as defined under Section 21 (3) of the Income Tax Act subject to Court adjustments at liquidation. Subsequently, its income is exempt from taxation when it meets thresholds under Section 21 (1) of Income Tax Act. The Appellant also stated that it matters not how the “other associations/clubs conduct their recruitment and vetting. They are independent institutions and free to engage as they deem fit. They have their own independent governing constitutions, which should not be imposed on the Appellant. Legally, there is no institution that expressly registers only member’s clubs and that member's clubs are recognized as such on the basis of their operations.

29. The Appellant opined that it should not be treated unfairly for executing the provision of Section 21 (3) in the absence of supporting regulations and or guidelines. Further, the Appellant argued that the Respondent cannot reclassify a group of the Appellant’s valid members as non-members based on their own inference of the word ‘entitlement’ under Section 21 (3) of Income Tax Act.

30. The Appellant contended that it demonstrated without reasonable doubt that the learners are indeed registered members of the association, regardless of the percentage of their entitlement. The Appellant stated that in each of the FYS 2016 to 2020, learners were registered as ordinary members of the association upon payment of membership access fee. The learners were entitled to the interest in the assets of the association in each of the FYs they enrolled courtesy of the membership payments.

31. That the Appellant's Constitution classifies members into 3 different categories: Honorary members, life members and ordinary members. No member can be registered outside the 3 categories or granted “temporary” membership access as alluded to in the Respondent's objection decision. The Appellant emphasized that despite different levels of membership, AA Kenya subjects its learners to same recognition and they have membership right to attend the Annual General Meeting (“AGM”) and participate in the voting process.

32. According to the Appellant, the learners were enrolled as ordinary members of the Appellant and granted membership cards upon payment of a membership access fee. These fees were used for the acquisition & maintenance of the Appellant's assets and facilities which are used by all members. The learners had access to the association's facilities for a whole year commensurate to their membership and in the event, liquidation occurred in each of those years, the respective learners were entitled to the interest in assets of the club pursuant to the provisions of Insolvency Act, 2015 and on instructions of a competent court.

33. The Appellant also stated that like other members, the learners are eligible to shift their membership grade and renew their subscriptions annually. Members are encouraged to renew their annual subscription but no one is compelled to do so. This treatment is consistent for all members. The Appellant reiterated that ordinary members, which includes, learners, were legally entitled to the assets of the association in a similar manner as honorary and life members. This entitlement is protected in law under Clause 10 of Appellants’ Constitution, which was shared with the Respondent. It states as follows:“Property of the Association10. 1The immovable property and all investments of the Association shall be vested in AA Limited, a nominee company Limited by guarantee.10. 2The movable property of the Association.”

34. According to the Appellant, the membership classes are in place to provide members with various category of benefits and not to take away their entitlement. More specifically, the constitution is clear that all members have a right to vote and participate in the AGM. The Governing Council mentioned above is elected by all members, including the learners, who paid membership access fees in the FYs 2016 to 2020, voted and participated in the AGMs.

35. The Appellant, in its submissions, reiterated the arguments brought out its pleadings and submitted that, the issues for determination are as follows:a.Whether the Respondent erred in misinterpreting Section 21 of the Income Tax Act (ITA) and usurped judicial powers by declassifying the Appellant's driving school learners to be non-members of the association.b.Whether the Respondent erred in assessing Corporate income tax on the Appellant's gross receipts based on irrelevant conditions not provided for in the tax laws, regulations and Gazette notices.

Appellant’s Prayers 36. The Appellant prayers are as follows:a.That the Objection decision dated 16th September 2022 be annulled and set aside in its entirety;b.That the Appeal be allowed;c.That the Tribunal provides an interpretation on the application of Section 21 (3) of the Income Tax Act;d.That the Tribunal awards costs of this Appeal to the Appellant; ande.Any other remedies that the Honourable Tribunal deems just and reasonable.

The Respondent’s Case 37. In response to the Appeal, the Respondent presented before the Tribunal as follows; -a.Statement of Facts dated and filed on 25th November 2022; andb.Written Submissions dated 21st February 2023 and filed on 22nd February 2023.

38. The additional assessment was issued to the association on 24th June, 2022 on the basis that the Appellant does not qualify to be a members’ club under Section 21 (1) of the Income Tax Act because more than 50% of its gross income is derived from driving school learners who do not qualify to be members as provided for under Section 21 (3) of Income tax Act. The Appellant lodged an objection to the assessed amount in its entirety.

39. The Respondent posited that the driving school learners do not qualify to be “members” of a club for the following reasons:i.The learners are given temporary “Access” to the driving school facilities for a limited period of time only. It does not entitle them to other services offered by AA Kenya.ii.The “membership cards” issued is only proof of entitlement to specific services such as emergency rescue or driving lessons, but does not mention entitlement to assets.iii.The leaners real motive when engaging AA Kenya, is to obtain training services and not membership to a member’s club. That is why there is no continued subscription after completing the driving lessons. The “membership fees” charged is therefore akin to registration fees charged by other colleges, which does not entitle the students to the assets of the college.iv.In ordinary members clubs, members are subjected to vetting and recommendation before admission as members but in the Appellant’ case, the alleged members walk-in clients meaning there is no long term commitment between the learners and other members.v.The Respondent argued that, the Appellant is not expressly registered as a members’ club hence there is no evidence it is a members club.vi.The Appellant’s Constitution does not provide for distribution of surpluses hence the surpluses are carried forward as retained earnings. There is therefore no “mutual” benefit accruing to the leaners who are temporary members.

40. The Respondent further averred that an analysis of financial statements revealed that more than 50% of revenue is from driving school as detailed in the table below. A summary of the percentages (Revenue from driving school as a percentage of total revenue) for the other years are 2018=55. 1%, 2017=54%, 2019=59. 6%.

41. The Respondent averred that the Appellant has a Constitution that outlines the rules of the association. That pages 5 & 6 of the Constitution outlines the categories of members (honorary, life and ordinary members). The Sample invoices provided reveal that driving school learners pay access membership fee of Kshs. 2,000. 00.

42. That Page 15 outlines the rules on dissolution of the association but does not mention the interest of members in the assets of the association in the event of liquidation.

43. Based on the above, the Respondent arrived at a decision that driving school learners do not meet the threshold of members as defined under ITA and subsequently issued objection decision to that effect.

44. The Respondent also relied on Section 21 (1), 21 (3), Income Tax Act to support its case.

45. The Respondent posited that the Appellant does not qualify to be a member’s club under Section 21 (1) of the Income Tax Act because more than 50% of its gross income is derived from the driving school learners who do not qualify to be members as provided for under Section 21 (3) of the Income Tax Act.

46. That since the Appellant does not meet the threshold of a members ‘club, the Appellant’s income is therefore not exempt from income tax and that Sections 15 and 16 are applicable to the Appellant’s operations.

47. That subsequently, the incomes earned in the years 2016 to 2020 have been brought to charge taking into account the provisions of Sections 15 and 16 of the Income Tax Act resulted in additional taxes of Kshs. 27,165,407. 00 as the following expenses were disallowed:a.Provisions for leave in the year 2018 of Kshs 7,979,412. 00. b.Provision for staff terminal dues in the year 2018 of Kshs 4,451,094. 00. c.Impairment of subsidiary in the year 2019 of Kshs 15,500,000. 00. d.Provision for bad debts of Kshs 5,893,843. 00.

48. According to the Respondent’s submissions, the following are issues for determination:i.Whether the Appellant qualifies to be a members’ club under Section 21(1) of the Income Tax Act; andii.Whether the Respondent’s assessment and subsequent objection decision were proper in law.

49. On Whether the Appellant qualifies to be a members’ club under Section 21 (1) of the Income Tax Act, the Respondent relied on the provision of Section 21 of the Income Tax Act.

50. The Respondent submitted that it based its decision in the objection decision on reviewing the supporting documents availed by the Appellant, that is; -i.The Certificate of Exemption from Registration-from Registrar of Societies,ii.AA Kenya Constitution and Rules,iii.Membership card template,iv.Sample Membership application/update form,v.Sample invoices,vi.Sample payment receipt

51. On further analysing the Appellant’s Constitution and Rules, the Respondent submitted that pages 5 & 6 of the same, outline, the categories of members (Honorary, Life and Ordinary Members). The sample invoices provided by the Appellant reveal that driving school learners pay access membership fee of Kshs 2,000. 00.

52. The Respondent submitted that page 15 of the Constitution outlines the rules on dissolution of the association but does not mention the interest of members in the assets of the association in the event of liquidation.

53. From the foregoing, the Respondent submitted that the Appellant does not qualify to be a member’s club under Section 21 (1) of the Income Tax Act because more than 50% of its gross income is derived from the driving school learners who do not qualify to be members as provided under Section 21 (3) of the Income Tax Act.

54. The Respondent urged the Tribunal not to adopt purposive approach in interpreting Section 21 (3) of the Income Tax Act and instead adopt a strict interpretation. The Respondent relied on Cape Brandy Syndicate vs. I.R. Commissioners [1921] IKB where it was held that in interpreting a tax statute there is no room for any intendment or implication.

55. Further the Respondent relied on the case of Republic vs. Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR (Barclays case’) wherein the High Court Judge Majanja, in this case held:“The approach to this case is that stated in the oft cited case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB as applied in T.M. Bell y Commissioner of Income Tax [1960] EALR 224 where Roland J. stated, “...in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing it to be implied. One can only look fairly at the language used…If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

56. The Respondent also relied on Mount Kenya Bottlers Limited vs. the Honourable Attorney General & 3 others [201 9] eKLR, where the Court held that“…the accepted principle in construing a tax statute is that the court is guided by the statutory words themselves and that there is no room for intendment or adopting a purposive approach when the words of the statute are clear and unambiguous”

57. The Respondent submitted that in its objection application, the Appellant puts a lot of emphasis on its Constitution yet the provisions of Section 21 (3) are so clear on what constitutes a member.

58. On whether the Respondent’s assessment and subsequent objection decision were proper in law.

59. The Respondent agreed with the Appellant that in taxing a taxpayer's income, every legally deductible expense that was incurred in generating such income should be deducted from the taxable amount as provided under Section 15 (1) of the Income Tax Act which states as follows:“(1)For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.”

60. The Respondent submitted that the provision above (Section 15 (1)) provides for deductions of expenses but it also gives antecedent conditions that must be met before such deductions are made. The first condition is that such a deduction must be allowed under Section 16 of the Income Tax Act for example it must not be a capital expenditure. The second condition is that it must be an expenditure wholly and exclusively incurred by the taxpayer in the production of income from which it is to be deducted.

61. Further, the Respondent submitted that it is mandated by law to ensure that any expenditure presented for deductions by a taxpayer meets these conditions. As such any deductions proposed must be analysed to determine whether they are allowed. The Respondent submitted that under Section 24 (2) of the Tax Procedures Act 2015, the Respondent in executing this mandate shall not be bound by a taxpayer’s returns or information and it on this basis that it confirmed the additional assessment on disallowed expenses.

62. The Respondent relied on Section 56 (1) of the Tax Procedures Act, 2015 taxpayer has an obligation to prove that a tax assessment is incorrect. The Respondent further submits that the Appellant has failed to prove to the satisfaction of the Respondent that it qualifies to be a members’ club under Section 21 (1) of the Income Tax Act and as such the Appellant's income is not exempt from Corporate Income Tax. The Respondent relied on cases of Commissioner Investigations and Enforcement vs. Evans Odhiambo Kidero Income Tax Appeal Eo28 of 2020), and Revenue Authority vs. Man Diesel & Turbo Se Kenya (2021 J eKLR to support the position that the tax payer has the burden of proof and has to prove that a tax decision is incorrect.

63. Apart from the above, the Respondent submitted that the fact that the Appellant has demonstrated an error in the assessment does not suffice to discharge its burden of proof. The Respondent relied on the case of Mulherin vs. Commissioner of Taxation [2013] FCAFC 115 to support this position.

64. Consequently, the Respondent submitted that its decision is well within the law.

The Respondent’s Prayers 65. Respondent urges this Tribunal:a.To affirm and declare the Confirmed Assessment Notices issued by the Respondent on the 16th September 2022 demanding Kshs. 27,165,407. 00 as tax due to be legal.b.To dismiss the Appeal for lack of merit with costs to the Respondent.

Issues for Determination 66. The Tribunal has carefully studied the parties’ pleadings and submissions and is of the respectful view that the issues that call for its determination are as hereunder: -a.Whether the Appellant's driving school learners meet the threshold of a “member” as defined under Section 21 (1) and (3) of the Income Tax Act; andb.Whether the Respondent was justified in confirming its assessment.

Analysis and Findings 67. The Tribunal addresses issues as hereunder: -a.Whether the Appellant's driving school learners meet the threshold of a “member” as defined under Section 21 (3) of the Income Tax Act.

68. The Respondent charged Corporate Income Tax on the Appellant’s income which the Respondent avers does not qualify for CIT exemption because more than 50% of the income is derived from driving school learners (“learners”) who do not qualify to be members in accordance with Section 21 (3) of the Income Tax Act.

69. The Respondent contended that the Appellant’s learners are given temporary “access” to the driving school facilities for a limited period of time only and did not entitle them to other services offered by AA Kenya. That the “membership cards” issued is only proof of entitlement to specific services such as emergency rescue or driving lessons, but does not mention entitlement to assets. The leaners real motive when engaging AA Kenya, is to obtain training services and not membership to a member’s club.

70. Members of an association are described under Section 21 (3) of the Income Tax Act as follows: -“(3)In this section—“member” means—a.in relation to a members’ club, a person who, while he is a member, is entitled to an interest in all the assets of such club in the event of its liquidation;b.in relation to a trade association, a person who is entitled to vote at a general meeting of such trade association.”

71. The Appellant’s view is that the word “entitled” as used in the above Section is not defined in the Income Tax Act or any other Tax statute and that in legal sense, “to entitle’’ is to give a right or title, therefore any right, material or immaterial, significant or insignificant, where granted to its members on properties is reasonable and falls in the purview of “entitlement” under Section 21 of ITA.

72. According to the Appellant, the provisions of Section 21 (3) of the Income Tax Act do not arrogate to the Commissioner rights in excess of those conferred upon him under the Law. The fact that the said provision is tied at the hip to liquidation indicate that “entitlement” and by extension membership of the Appellant's is a prerogative function of the Appellant's contributories and creditors on instruction of a competent court as clearly stipulated under the provisions of Sections 454 and 455 of the Insolvency Act, 2015. Put differently, the Respondent's actions to “reclassify” members to be “non-members” is usurpation of judicial authority to establish and determine who has rights, adjustment to those rights and extent of those rights.

73. The Appellant maintained that learners are ordinary members because they were registered as ordinary members of the association upon payment of membership access fee. To substantiate this position, the Appellant adduced one sample membership access card, sample membership application form and sample invoices. An invoice in the name of Suleiman Sudi Kulonda indicates that Suleiman paid Kshs. 18,780. 00 broken down as follows: Kshs. 15,500. 00 for driving lessons, Kshs. 700. 00 for AA Manual, Kshs. 580. 00 for Service Charge and Kshs. 2,000. 00 for Access Membership.

74. The Appellant further argued that in any case where the interpretation of ‘members’ under Section 21 (3) resulted in two or more possible meanings, the inclination of the court should be against a construction or interpretation which imposes a burden, tax or duty on the subject relying on the case of Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others to buttress this position.

75. The Tribunal has analysed the Appellant’s constitution, registration documents, sample membership card, sample membership application form and sample invoice and established that the Appellant maintained different classes of members; honorary members, life members and ordinary members and that the learners were classified as ordinary members.

76. Noteworthy is that Articles 3. 3.2 and 3. 3.3 of the Appellant’s Constitution which requires the members to pay annual fees as and when they fall due failure to which the person ceases being a member of the association and their names expunged from the register of members. The Respondent argued that the learners did not pay these annual fees after completing their learning, however the Appellant maintained that they were maintained on the member’s registered and subjected to same recognition and membership right to attend the Annual General Meeting (“AGM”) and participate in the voting process.

77. From the above, it is evident to the Tribunal that the learners are indeed members of the association as per the constitution of the Association. However, Section 21 (3) of the ITA only recognizes members if those members are entitled to a share of the assets of the association upon liquidation. The Appellant’s constitution outlines the rules on dissolution of the association but does not mention the interest of members in the assets of the association in the event of liquidation. Wherefore, such entitlement would only be determined by a court of competent jurisdiction as stipulated under the provisions of the Insolvency Act.

78. Having thus concluded, and in the absence of a determination under the Insolvency Act alienating the Ordinary Members from entitlements to assets of the Association upon liquation, the Tribunal holds that the Ordinary Members be treated as members as per Section 21 (3) of the ITA.

79. Consequently, the Tribunal finds that the Appellant's driving school learners meet the threshold of a “member” as defined under Section 21 (3) of the Income Tax Act.

b. Whether the Respondent was justified in confirming its assessment. 80. The Respondent charged Corporate income tax on the Appellant’s income which the Respondent averred does not qualify for CIT exemption because more than 50% of the income is derived from driving school learners (“learners”) who do not qualify to be members in accordance with Section 21 (3) of the Income Tax Act. Consequently, the Respondent assessed CIT on the Appellant's income in the FYs 2016 to 2020 on the premise that the Appellant is not exempt from CIT in accordance with Section 21 (1) of the Income Tax Act.

81. On the other hand, the Appellant contended that a member's club which derives more than 75% of its gross income from members is not subject to CIT under the Provisions of Section 21 (1) of the Income Tax Act.

82. The Tribunal having held that the Appellant’s driving school learners were ordinary members and thus members as per Section 21 (3) of the ITA, it follows that the driving school services were offered to members of the Association and therefore the income therefrom qualifies for exemption under Section 21 (1) of the ITA.

83. Consequently, the Tribunal finds that the Respondent was not justified in confirming its assessment.

Final Decision 84. The upshot of the foregoing is that the Appeal has merit and the Tribunal makes the following Orders: -a.The Appeal be and is hereby allowed;b.The Respondent’s Objection decision dated 16th September 2022 be and is hereby set aside; andc.Each party to bear its own cost

85. Orders accordingly.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY, 2024ROBERT MUTUMA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERDR WALTER ONGETI - MEMBER