[2025] KETAT 224 (KLR)

Daykio Plantations Limited v Commissioner of Domestic Taxes (Tax Appeal E468 of 2024) [2025] KETAT 224 (KLR) (2 May 2025) (Judgment)

Neutral citation: [2025] KETAT 224 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E468 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

May 2, 2025

Between

Daykio Plantations Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company registered under the Companies Act Cap 486 Laws of Kenya and whose principal activity is buying, selling and developing land/property.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. Following a review of Appellant’s tax returns for the 2018 to 2022 years of income, the Respondent by way of a demand letter dated 29th November 2023 demanded principal taxes amounting to Ksh 252,210,226. 00 comprising corporate tax, Pay as You Earn (PAYE) and Value Added Tax (VAT).

4. The Appellant objected to the assessment vide a notice of objection dated 22nd January 2024 conceding to part of the assessed taxes amounting to Kshs. 24,207,470. 00 in relation to corporate tax, PAYE and VAT and proceeded to enter into a payment plan where the first installment was made on 22nd January 2024.

5. The Respondent’s objection decision dated 21st March 2024 sustained and confirmed the principal taxes as previously assessed.

6. Aggrieved by the Respondent’s objection decision dated 21st March 2024, the Appellant filed its notice of appeal dated 19th April 2024 on even date at the Tribunal.

The Appeal 7. The Appellant’s case was predicated upon a Memorandum of Appeal dated 2nd May 2024 and filed on 3rd May 2024 wherein the Appellant held that;i.The Respondent erred in law and in fact in applying the wrong principles of tax assessment in disallowing loan interest expense claimed by the Appellant on the basis that it failed as an expense within the meaning of Section 15 of Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) as an allowable expense thereby arriving at a decision that was fundamentally flawed.ii.The Respondent erred in law and in fact in disallowing interest expense in regard to loan facilities taken by the Appellant to purchase the property known as L.R No. 11287 ignoring the documentary evidence provided in support of this claim by the Appellant.iii.The Respondent erred in law and in fact in holding that the loan expenses were not incurred in generation of income earned by the Appellant for the erroneous reason that the Appellant did not suffer the burden of repaying the said loan facilities.iv.The Respondent erred in law and in fact in holding that allowing loan expense as a deductible expense by the Appellant other than the bona fide borrower would lead to risk of double expensing.v.The Respondent erred in law and in fact in holding that the Appellant failed to submit any documentary evidence disapproving the Respondent’s assessment on sales refund thereby failing to discharge its burden of proof as provided for under Section 56(1) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).vi.The Respondent erred in law and in fact in holding that the Appellant had undeclared interest income amounting to Ksh 13,205,666. 00 in the year 2018 and failed to prove that the said income was for the year 2016. vii.The Respondent erred in law and in fact in holding that the Appellant had under declared sales by transferring seven (7) of its properties valued at Ksh 56,000,000. 00 as gifts to third parties.viii.The Respondent erred in law and in fact in holding that the Appellant’s transfer of its property worth Ksh 120,000,000. 00 was an attempt to erode its tax base.ix.The Respondent erred in law and in fact by wrongly holding that the Appellant being a land buying company with the objective of making profit could not transfer property by way of Deed of Gift for no valuable consideration.

Appellant’s Case 8. The Appellant’s Statement of Facts dated 2nd May 2024 were filed on 3rd May 2023.

9. The Appellant stated that on 22nd March 2013, it paid a deposit of Ksh 130,250,000. 00 in relation to property titled L.R. No. 11287(referred to as Ruera I) belonging to Green Seal Properties Limited. Subsequently, on 2nd July 2013, the Appellant and Nofolan Investment Limited entered into a share purchase agreement for purchase of all the shares of Green Seal Properties Limited for a consideration of Ksh 1,302,500,000. 00 wherein the Appellant became the legal owner of the property titled L.R. No. 11287. In order to clear the balance of Ksh 1,200,000,000. 00, the Appellant obtained a loan facility on 19th April 2013 upon execution of a charge on the Ruera I property which was registered on 14th August 2013 with Green Seal Properties as the Chargor and the Appellant as the borrower.

10. Further, on 11th March 2015, the Appellant applied for a further loan facility to clear the earlier loan which was finalized on 17th March 2015 and was secured by a charge on property L.R. No 209/409/6 belonging to the Appellant. Later, on 16th September 2020, the Appellant invested Ksh 120,000,000. 00 in Kenya Orient Life Assurance Limited (KOLAL) by way of property transfer as consideration.

11. It was the Appellant’s case that it held the sole responsibility of repaying the two loan facilities obtained from two different financiers in addition to owning Ruera I (now christened Daykia Bustani) which was one of the Appellant’s income generating ventures. Further, the Appellant held that its loan facilities were aligned to its core business as provided for in its Memorandum of Association at Clause 3(k) and (I) and thus qualified as allowable expense as couched under Section 15 of the ITA.

12. According to the Appellant, the Respondent erred in assessing corporation tax because the disallowed interest expense related to loan interest expense that ought to have been allowed since the facility was obtained for the purpose of acquiring a property through purchase of all the share capital of Green Seal Properties Limited as evidenced by availed sales agreement and bank statements which proved that the Appellant had been paying the loan until completion.

13. The Appellant was adamant that it duly provided all the required and requested documents by the Respondent who disallowed the Appellant’s interest claim holding that the Appellant was not the registered owner of Ruera I that was used to secure the first loan facility choosing instead to hold that the Appellant had not borne the burden of repaying the facility and that allowing the same would risk double expensing.

14. In addition, the Appellant disputed the disallowance of the sales refund as it had rightfully produced all documentary evidence supporting the same including financial statements indicating the variances, for instance, the Appellant pointed out that in the 2018 financial year, its total sales refunds amounted to Ksh 20,780,000. 00 yet the Respondent in its findings letter disallowed sales refunds totaling to Ksh 21,827,093. 00 Similarly, in the 2020 financial year, its sales refunds amounted to Ksh 35,550,000. 00 yet the Respondent in its findings letter disallowed sales refunds totaling to Ksh 1,500,000. 00 all of which amounted to 23,327,093. 00 as presented in the objection decision.

15. It was the Appellant’s case that this position of the Respondent was unjustified and unmerited as the Appellant had pursuant to Section 56 of the TPA discharged its duty by providing all the supporting documents, instead it was the Respondent who failed to specifically point out and/ or give any breakdown of disallowed sale agreements for refunds.

16. The Appellant further held that demanding payment of undeclared interest income was tantamount to double taxation as the Appellant had provided documentary evidence in form of all manual withholding tax returns generated from i-Tax accounting for the same. Specifically, the Appellant had outlined that Ksh 13,205,666. 00 raised by the Respondent related to interest income earned in the year 2016 and not year 2018 noting that it had manually filed interest income for the 2016 but uploaded the same in year 2018 and had provided all the manual withholding certificates to the Respondent. Therefore, the assertion by Respondent that the Appellant had undeclared interest income for year 2018 was not only incorrect but unjustified and proof that the Respondent failed to consider the documents presented by the Appellant leading to double taxation.

17. The Appellant asserted that there was no monetary consideration received in respect to the seven parcels as the same were gifts and recipients had paid the requisite stamp duty assessed prior to registration of the same in their names. The Appellant stated that its Memorandum of Association permitted it to deal with property however they wish and it was erroneous for the Respondent to infer underdeclared sales yet the Appellant disclosed them as gifts. Moreover, the Appellant stated that it provided statements showing it never received any consideration upon transfer of the seven parcels which were gifts to third parties.

18. It was the Appellant’s case that the disputed taxes raised in relation to KOLAL for property transfer valued at Ksh 120M were in error as the transfer was by way of gift and not sale. The Appellant emphasized its right to invest in other companies as provided by its Memorandum and Articles of Association and that KOLAL paid the requisite stamp duty based on a Valuer’s report all of which was finalized on 15th October 2020 as proven by the availed bank statements. The Appellant was adamant that the transaction was not an attempt at erosion of its taxable base.

19. It was the Appellant’s case that nothing prohibits it from transferring property by way of deed of gift as provided by its Memorandum of Association at Clause 3(uu) and in line with Section 28 of the Companies Act, CAP 486 of the Laws of Kenya (hereinafter “Companies Act”) which provides as follows:“(1)Unless the articles of a company specifically restrict the objects of the company, its objects are unrestricted.”

20. The Appellant held that the VAT assessed amount was erroneous noting the Respondent’s own admission that VAT payments by the Appellant had not been credited in its VAT i-Tax ledger. However, in relation to PAYE, the Appellant conceded to the Respondent’s assessment.

21. The Appellant asserted that the Respondent’s assessment were frivolous and made in bad faith as there was no basis of disallowing loan interest as expense, disallowing sales refund or the claiming of undeclared interest income for the year 2018. Further, that the claim of under declared sales in the transfer of seven parcels as well as the transfer of property to KOLAL equally lacked basis.

Appellant’s Prayer 22. The Appellant sought the following reliefs from the Tribunal:a.The Appeal be allowed with costs.b.The part of the Respondent’s objection decision dated 21st March 2024 disallowing the Appellant’s objection in part be set aside in particular:i.Disallowed loan interest expense;ii.Disallowed sales refund;iii.Undeclared interest income for year 2018;iv.Under declared sales; andv.Transfer of property worth Ksh 120,000,000. 00 by the Appellant to KOLALc.Any other orders the Tribunal may deem fit.

Respondent’s Case 23. The Respondent replied to the Appeal through its Statement of Facts dated 6th June 2024 and filed on 7th June 2024.

24. According to the Respondent, the Appellant received multiple loan deposits in its overdraft account that were immediately transferred to KOLAL and were discovered to be capital injections. That on 27th August 2019, the Appellant’s overdraft account was deposited loan amount of Ksh 862,604,000. 00 which was repaid on 29th April 2020 in unexplained circumstances. Further, that the registered owner of property L.R. No 11287 was Green Seal Properties and had been used to secure a loan of Ksh 1,200,000,000. 00, the loan interest was expensed by the Appellant despite absence of any connection to the property through ownership or otherwise.

25. The Respondent stated that upon 100% analysis of Appellant’s plots of land known as Daykio Bustani where land stock was verified, the Appellant was found to have correctly accounted for plots sales accurately save for seven plots that had been given out as gifts to various third parties, their offer price was used to bring them charge. In addition, write offs for the year 2017 to 2021 were disallowed for lack of supporting documentation despite request for the same on 19th July 2023. Similarly, that analysis of stock sheets for Birika Plots that were sold in year 2019 established unaccounted for sales which again were brought to charge.

26. It was the Respondent’s case that the Appellant excluded rental income from its 2018 tax declarations which were brought to charge in addition to variances discovered in relation to refunds declarations made in the financial statements vis a vis the Appellant’s own analysis.

27. In regards to VAT, the Respondent held that sales variances brought to charge were discovered when a sales analysis was carried out between the sales as per the Appellant’s general ledger and VAT declarations.

28. The Respondent averred that PAYE was charged pursuant Section 5(2) 2B of ITA upon discovery that the Appellant had utilized an amount of Ksh 10,187,100. 00 in purchase of a private motor vehicle for use by one of its directors.

29. The Respondent fashioned the following seven issues as falling for determination in this Appeal;i.Whether the loan interest expense claimed by the Appellant qualifies as an allowable expense under Section 15 of the ITA given the ownership status of the property L.R No. 11287. ii.Whether the loan interest expense claimed by the Appellant was incurred for generating income and whether the Appellant bore the burden of repaying the loan facilities.iii.Whether allowing the loan expense as a deductible expense would lead to the risk of double expensing.iv.Whether the Appellant provided sufficient documentary evidence to disprove the Respondent’s assessment regarding sales refund.v.Whether the Appellant had undeclared interest income amounting to KShs. 13,205,666. 00 in the year 2018 and if it was correctly assessed.vi.Whether the Appellant under-declared sales by transferring seven parcels of land valued at KShs. 56,000,000. 00 as gifts to third parties.vii.Whether the Appellant’s transfer of property worth Kshs. 120,000,000. 00 was an attempt to erode its taxable base and Whether the Appellant, as a land buying company with the objective of making a profit, can transfer property by way of Deed of Gift for no valuable consideration without it being subject to tax.

30. The Respondent proceeded to analyze the combined issues as hereunder;

31. That the fundamental principle in determining the deductibility of any expenditure for tax purposes is as couched under Section 15(1) of the ITA which provides that for an expense to be deductible, it must be incurred wholly and exclusively in the production of income i.e. a clear and direct connection between the expenditure and the income-producing activities of the Appellant as was held in the case of HCITA No. 6 of 2018, Mars Logistics Vs. Commissioner Domestic Taxes.

32. According to the Respondent, the Appellant’s loan was not taken for business advancement despite the averment that it was taken to acquire property titled L.R. No. 11287. The Respondent held that the Appellant failed to demonstrate how the said property was used in business operations to produce income such as business activities, revenue generated or its role in the overall business strategy yet the burden of proof was on the Appellant to show how the expenses met the statutory criteria for deduction.

33. It was the Respondent’s case that neither the ownership documents for property L.R. No. 11287 substantiated the claim that the property was registered in Appellant’s name nor that the expense was for Appellant’s commercial interests as there was not nexus between the loan and Appellant’s business activities that was established satisfactorily. As a result, there was risk of double expensing by both the Appellant and the registered property owners-Green Seal Property Limited which would lead to reduction in overall tax liability.

34. The Respondent held that the burden of demonstrating that the loan expense claim by the Appellant was wholly and exclusively incurred by it and not any other party was not substantiated and that similarly, that the Appellant failed to provide adequate documentary evidence to disprove sales refund assessment as provided for under Section 56(1) of the TPA as read with Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter "TATA”).

35. The Respondent further held that the Appellant had undeclared interest income amounting to Ksh 13,205,666. 00 in the year 2018 which it failed to prove was attributable to the year 2016 as claimed.

36. It was the Respondent’s case that the transfer of seven parcels of land as gifts did not fall under the category of transactions done at arm’s length but were essentially gifts pursuant to provisions of ITA and must be treated as sales valued at market value for tax purposes. This is because the Appellant as a land buying and selling company is required to report trading stock (Land parcels) as sales for tax purposes noting that gifts were not exempt. The Respondent cited Paragraph 9 of the 8th Schedule to the ITA which reads;“Market valueWhere property is acquired or transferred—(a)otherwise than by way of a bargain made at arm’s length;(b)by way of a gift in whole or in part;(c)for a consideration that cannot be valued; or(d)as the result of a transaction between persons who are related then, for the purposes of—(i)paragraph 7 of this Schedule, the amount of the consideration for the transfer of the property shall be deemed to be equal to the market value of the property at the time of the transfer; and(ii)paragraph 8 of this Schedule, the amount of the consideration for the acquisition of the property shall be deemed to be equal to the market value of the property at the time of the acquisition or to the amount of the consideration used in computing stamp duty payable on the transfer by which the property was acquired, whichever is the lesser.”

37. The Respondent held that it was incorrect for the Appellant to fail to report gifts or give away as the activity impacted income for tax purposes. The Respondent asserted that the transfer of property worth Ksh 120,000,000. 00 was an attempt to erode taxable base and that it had the authority under Section 23(1) of the ITA to re-characterize transactions aimed at tax avoidance. The cited section provides;“23(1) Transactions designed to avoid liability to tax(1)Where the Commissioner 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.”

38. It was the Respondent’s assertion that its assessments were based on a thorough audit and adherence to the relevant provisions of the ITA and TPA that instead it was the Appellant who failed to meet the threshold of burden of proof to disprove the Respondent’s findings.

39. The Respondent made the following prayers:i.That the Tribunal dismiss the Appeal with costs to the Respondent.ii.That the Tribunal upholds the Respondent’s objection decision dated 21st March 2024.

Parties’ Written Submissions 40. The Tribunal adopted both parties written submissions on 29th January 2025. The Appellant’s written submissions dated 29th October 2024 were filed on 31st October 2024 whereas those of the Respondent were dated and filed on 12th November 2024. Parties restated and expounded on their positions as held in their statement of facts, in their respective written submissions. The Tribunal considered both submissions in this Judgement but will not rehash them.

Issues for Determination 41. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions adduced before it notes that the disputed corporate tax and VAT was as a result of disallowed interest expense, undeclared interest income, disallowed sales refunds, undeclared/under declared sales, property transfer by way of gift and share purchase by way of property transfer.

42. The Tribunal has established the following seven issues as falling for its determination as follows:i.Whether the Respondent erred in disallowing loan interest expense.ii.Whether the Respondent erred in bringing to charge interest income for the year 2016. iii.Whether the Respondent erred in bringing to charge rental income.iv.Whether the Respondent erred in disallowing Appellant’s sales refund.v.Whether the Respondent erred in bringing to charge Appellant’s undeclared/underdeclared sales.vi.Whether the Respondent erred in bringing to charge, at market rate, the Appellant’s seven parcels of land transferred by way of deed of gift.vii.Whether the Respondent erred in considering share purchase in kind at KOLAL as a sale

Analysis and Findings 43. The Tribunal having established seven issues for determination will proceed to analyze them as follows;

i. Whether the Respondent erred in disallowing loan interest expense. 44. The instant dispute arose out of a tax returns review against the Appellant for the 2018 to 2022 years of income that resulted in a demand for principal taxes totaling Ksh 252,210,226. 00 comprising corporate tax, PAYE and VAT. The Appellant conceded to PAYE but contested corporate tax and VAT hence the Appeal at hand.

45. The Tribunal notes that the Appellant expensed loan interest in its books of accounts stating that this was because it had entered into a share purchase agreement for all shares of Green Seal Properties Ltd who is the legal owner of L.R No. 11287 (hereinafter “the property”). Upon acquiring shares in Green Seal Properties Limited, the Appellant secured a loan facility using the said property that was in the name of Green Seal Properties Limited. The Respondent’s view was that that the registered owner of property was Green Seal Properties and as a result loan interest could be expended against the books of account of Green Seal Properties as the Appellant did not own the property.

46. The Tribunal notes that it was not disputed that there existed a loan facility secured using the property registered in the name of Green Seal Properties, what was in dispute is which entity ought to charge in their books of accounts. The Appellant was adamant that it charged the interest in its books as the loan was obtained to repay the balance of share consideration and to further its business which was contested by the Respondent who stated that there was likelihood of double expensing.

47. The Tribunal’s view is that the Appellant having proven purchase of shares and equally provided proof of loan disbursement in its accounts together with loan interest payment details in its bank statements. However, the Tribunal has noted that the principal activity of the Appellant is the purchase of land. In purchasing the shares in Green Seal Properties Limited, it appeared to be indirectly engaging in its principal activity. However, the Tribunal observes that in accounting, the matching concept requires that expenses are matched with revenues they helped generate in the same accounting period. This ensures that financial statements accurately reflect the relationship between costs and revenues. The basis of this concept is embodied in the provisions of Section 15 of the ITA.

48. The Tribunal’s observation and view is that the loan obtained was not used in generating the income for the year under review since the purchase was a share purchase and hence an investment/ fixed asset and was not used to generate income in the year under review and accordingly expensing the loan interest in its books as was contrary to the provisions of Section 15 of the ITA.

49. Consequently, the Tribunal finds that the Respondent did not err in disallowing Appellant’s loan interest expense.

ii. Whether the Respondent erred in bringing to charge interest income for the year 2016. 50. The Tribunal notes that the Appellant stated that undeclared interest income amounting to Ksh 13,205,666. 00 related to the year 2016 and that the demand by the Respondent for payment of the same was tantamount to double taxation. Further, that even though the interest income related to year 2016, it was uploaded on i-Tax in the year 2018 as evidenced by documentation adduced by the Appellant in evidence namely the withholding tax returns generated from i-Tax system. On its part, the Respondent held that the Appellant failed to prove that the interest income was attributable to the year 2016 as claimed.

51. The Tribunal notes that the TPA provides clear guidelines to be followed in disclosing prior period income as guided by Section 37D(3) of the TPA which provides as follows:“A person with a tax liability may apply to the Commissioner for relief in the prescribed form with respect to tax liabilities that accrued within a period of five years prior to 1st July 2020. ”

52. The Tribunal is of the view that the Appellant ought to have formally applied to the Respondent to be allowed to declare the 2016 income in the year 2018. The Appellant failed to demonstrate to the Tribunal that it complied with the mandatory laid-out procedure in Section 37D of the TPA in declaring its 2016 interest income and accordingly the Tribunal finds the decision of the Respondent to charge the income to tax to be correct.

iii. Whether the Respondent erred in bringing to charge rental income. 53. The Tribunal notes that in spite of the Appellant’s admission that Ruera I (now christened Daykio Bustani) was one of its income generating ventures, there was no attempt by it in addressing the Respondent’s assertion that it earned rental income but never accounted for it. The Tribunal observes that the appeal was against the entire assessment but the Appellant never pleaded against the rental income in its Memorandum of Appeal nor argued the same in its Statement of Facts. The Tribunal notes that the Appellant’s duty is to demonstrate that the Respondent’s decision as couched under Section 56(1) of the TPA is incorrect or should have been made differently. The Tribunal finds in this regard that the Appellant did not discharge its burden of proving that the decision of the Respondent was incorrect and accordingly, the Respondent did not err in bringing to charge rental income.

iv. Whether the Respondent erred in disallowing Appellant’s sales refund. 54. It was the Appellant’s case that in the course of business it incurred the sales refunds and went ahead to provide a typed schedule of sales refund disallowed amounting to Ksh 23,327,093. 00 which it claimed were rightful as evidenced by supporting documents adduced including financial statements.

55. The Tribunal notes that the Appellant neither availed transaction documents that provided a trail of the sales refunds nor demonstrated how the itemized sales refunds were traceable to financial statements and bank statements. On numerous occasions, the Tribunal has held that documents supplied to the Respondent at the objection stage must also be adduced before the Tribunal as was held in the case of Faisawema Company Limited vs Commissioner of Domestic Taxes, TAT 326 of 2022 as follows:“…the assertions that the Appellant provided documents, must be shown at the Tribunal as well.”

56. The Tribunal finds that the Appellant failed to discharge its burden of proving that the Respondent’s decision in this regard was incorrect and accordingly the Respondent did not err in disallowing the Appellant’s sales refunds.

v. Whether the Respondent erred in bringing to charge Appellant’s undeclared and under declared sales. 57. The Tribunal notes the Respondent’s assertion that upon 100% analysis of Appellant’s plots of land known as Daykio Bustani where land stock was verified, write offs for the year 2017 to 2021 were disallowed for lack of supporting documentation. That similarly, an analysis of stock sheets for Birika Plots that were sold in year 2019 established unaccounted for sales. That a further sales analysis carried out comparing the general sales ledger and VAT declarations of the Appellant yielded vatable sales variances that were equally brought to charge. On its part, the Appellant neither addressed the write offs for the years 2017 to 2021 nor unaccounted for sales for the year 2019.

58. The Tribunal finds that the Respondent’s decision to bring the undeclared and under declared sales to charge was correct as the same were not disputed by the Appellant.

vi. Whether the Respondent erred in bringing to charge, at market rate, the Appellant’s seven parcels of land transferred by way of deed of gift. 59. The Tribunal notes that the Respondent held that upon 100% analysis of Appellant’s plots of land, the Appellant was found to have correctly accounted for plot sales accurately save for seven plots that had been given out as gifts to various third parties. The Appellant contested this position stating that the seven plots were transferred to third parties by way of deed of gift with no monetary consideration received and the recipients paying their respective stamp duty for their property. It was the Appellant’s case that Clause 3(uu) of its Memorandum of Association provided for such gifting of property to third parties.

60. The Respondent thereby sought to bring to charge the seven plots by its decision that the seven plots were undeclared sales. Accordingly, the Respondent proceeded to rely on the provision of the Eighth Schedule to the ITA in making a determination that the value of the undeclared sales ought to be construed to be the market value.

61. The Tribunal notes that the Appellant did not disclose the nature of its relationship to the third-party recipients and also that the Appellant did not explain in detail its reasons for gifting for example, whether the third parties were related parties. This would have assisted the Respondent in establishing whether these were payments in kind for services rendered or generally the circumstances under which the third parties were gifted.

62. The Tribunal under the circumstances observes that the cost of the gifted land did not constitute a cost wholly and exclusively incurred in the generation of the income of the Appellant. Accordingly, these costs are not allowable as a deductible expense in arriving at the taxable profit pursuant to the provisions of Section 15 of the ITA.

63. The Tribunal notes that the Respondent brought to charge a value equal to the market price of the parcels of land. However, the Tribunal takes a contrary view that it is the cost of the parcels of land that ought to be added back in determining the taxable profit.

64. Accordingly, the Tribunal finds that the Respondent erred in bringing to charge, at market rate, the Appellant’s seven parcels of land transferred by way of deed of gift.

vii. Whether the Respondent erred in considering share purchase in kind at KOLAL as a sale for tax purposes. 65. The Tribunal notes that the Appellant disputed taxes raised in relation to KOLAL for property transfer valued at Ksh 120,000,000. 00 holding that the transfer was by way of gift and not sale since its Memorandum of Association as read with its Articles of Association provided for its right to invest in other companies. Further, that KOLAL paid the requisite stamp duty based on a Valuers report all of which was finalized on 15th October 2020. In challenging this position, the Respondent stated that the Appellant received multiple loan deposits in its overdraft account that were immediately transferred to KOLAL and were discovered to be capital injections.

66. The Tribunal notes that transactions that are not in consideration should be at arm’s length, this is what the Appellant must prove to discharge the Respondent’s tax burden as couched under Section 56(1) of the TPA) and Section 30 of the TATA.

67. The Tribunal’s view is that the Appellant ought to demonstrate that that the property transferred to KOLAL was transferred at an arm’s length reflecting the true market value. The second view of the Tribunal in this regard is that the Appellant did not adduce into evidence the increase in its shareholding in KOLAL upon the transfer of the property to buttress its argument that this was a capital injection.

68. The Tribunal notes that whereas a Valuers report on the property and stamp duty payments by KOLAL were availed, the Appellant only availed a share certificate indicating its shareholding in KOLAL at 36,000 ordinary shares out of the 150,000 ordinary shares of KOLAL. The Appellant failed to demonstrate how its shareholding in KOLAL increased and the value of the same which would have aided the Tribunal in establishing whether the transaction was a capital injection as the Appellant had averred.

69. The Tribunal reiterates the holding in the case of Osho Drappers Limited vs Commissioner of Domestic Taxes Appeal No. 159 of 2018, that;“…the documentation must be supported by an underlying transaction and the taxpayer must furnish that there was an actual purchase.”

70. The Tribunal consequently finds that the Respondent did not err in considering the share purchase in KOLAL as a sale for tax purposes.

Final Decision 71. Based on the foregoing analysis and findings, the Tribunal makes the follows Orders:a.The Respondent to re-compute the taxable profit arising from the seven gifted plots.b.The Respondent’s confirmed assessment on all other items be and are hereby upheld.c.Each party to bear its own costs.

72. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 2ND DAY OF MAY, 2025CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER