[2023] KETAT 318 (KLR)

Duro Farms Limited v Commissioner of Legal Services and Board Coordination (Appeal 267 of 2021) [2023] KETAT 318 (KLR) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 318 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 267 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

May 19, 2023

Between

Duro Farms Limited

Appellant

and

Commissioner Of Legal Services And Board Coordination

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya pursuant to the provisions of the Companies Act.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority 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 vide a letter dated 21st April 2020 issued the Appellant with an assessment demanding the payment of tax on under-declared trust income as well as Withholding tax on payment made for the period between 2014 and 2017. The assessment amounted to Kshs.280,651,758. 00 being Corporation tax of Kshs. 95,039,799. 00, WHT of Kshs.66,837,552. 00 and interest and penalties of Kshs. 118,774,406. 00.

4. The Appellant objected to the assessment vide a letter dated 20th May 2020. Thereafter there were engagements between the parties and exchange of documents.

5. The Respondent issued its objection decision on 20th April, 2021 confirming the assessments.

6. Aggrieved by the Respondent’s decision to confirm the assessment, the Appellant lodged the Notice of Appeal dated and filed on 19th May, 2021 and further filed the Appeal on 4th June, 2021

The Appeal 7. The Appeal is premised on the grounds of appeal as stated in the Memorandum of Appeal dated 2nd June, 2021 and filed on 4th June, 2021, that:-a.The Respondent erred in fact and in law in determining that the transfer of trust assets from a trustee to a beneficiary results in a gain subject to income tax.b.The Respondent erred in law and in fact by failing to acknowledge that the Appellant was merely holding assets in trust for Rainforest Kenya Limited (RFKL) who was the owner of the assets and therefore did not make any gain on the transfer of the trust assets.c.The Respondent erred in law and in fact by demanding the payment of withholding tax (WHT) from the Appellant in relation to payments who’s WHT had already been assessed and settled in full by RFKL.d.The Respondent erred in law and fact by failing to provide reasons for the WHT assessment contrary to the Appellant’s right to fair administrative action under article 47 of the constitution of Kenya.e.The Respondent erred in law and in fact by issuing a tax assessment after five (5) years limitation period set out under Section 29(5) of the TPA.

The Appellant’s Case 8. Appellant’s case is premised on the Appellant’s Statement of Facts dated 2nd June 2021 and filed on 4h June, 2021 together with the documents attached thereto.

9. The Appellant submitted that the tax assessments issued by the Respondent related to its interaction with unrelated companies i.e. Rain Forest International and Rain Forest Kenya Limited(RFKL). That the Appellant was owned by Mungai Karanja (Mungai) who was employed by RFKL between the year 2013-2015.

10. It stated that RFKL on the other hand was owned by foreign investors from South America and is involved in the business of floriculture. That Mungai was a key employee tasked with the operationalization of RFKL in its initial stages of operation including the establishment of the business of RFKL which entailed the identification of suitable land in Naivasha for flower farming and the shipping, delivery and installation of equipment on the farm.

11. The Appellant averred that the process of setting up RFKL in Kenya began in 2013, however, being a company owned by foreigners, the process of incorporation was lengthy for the following reasons;a.The incorporation documentation had to be sent to the foreign investors in South America for their review and in other instances, for their execution before a notary public and return back to Kenya by courier.b.Once incorporated, there were delays in obtaining the PIN for RFKL on account of the foreign ownership of the entity.c.Once the PIN was obtained, the process of opening a bank account in Kenya was delayed due to the KYC required for foreign investors, which include a physical confirmation of the identity of the key investors, who were required to travel to Kenya for this purpose.

12. The Appellant added that on the other hand, one of the most important periods of the year for floriculture company was February, and in particular, the week leading up to Valentine’s day. Therefore, Mungai’s key deliverable was to ensure that RFKL was fully operational well before Valentine’s day of 2014.

13. That this meant that RFKL would have had all greenhouses fully constructed, flowers cultivated and grown and ready for harvesting before February 2014, to enable the flowers to be shipped to Europe and America ahead of Valentine’s Day 2014. That it was important to note that flowers need 12-16 weeks to grow from the time of planting a seedling to fully grown.

14. The Appellant explained that working backwards, it meant that the flowers would have needed to be planted no later than end of September 2013 if they were to be ready for Valentine’s day of 2014. Additionally, the greenhouses which had a construction timeline of 6-8 months would have needed to be fully constructed before this time and therefore construction would have needed to commence no later than early April 2013 to meet the target date.

15. That however, there was a practical challenge that arose relating to how the shipment of equipment to be used in the construction of the greenhouses was to be effected, noting that RFKL was not operational until late 2013. Mungai, who was RFKL’s point man on the ground had no option but import the greenhouses and equipment into the Country for and on behalf of RFKL through his company Duro Farms which is the Appellant in this case.

16. The Appellant added that it was important to note that Mungai and his company Duro Farms (The Appellant) did not utilize his own funds at all in the process of setting up RFKL; all funds were provided by the foreign investors to allow the Appellant to place the orders of the greenhouses and the equipment and to facilitate their importation into Kenya, including the payment of all customs duties through the port of Mombasa. That the Appellant therefore undertook the required construction and even engaged various contractors to undertake the various required works.

17. That from the accounting perspective, the Appellant recognized the funds received for purposes of the construction as a loan due to the foreign investors through their company - Rain Forest Inc.

18. The Appellant averred that the construction and planting proceeded as planned, the February 2014 target was met and the crop was ready for the market. Subsequently, on 1st July, 2014, the Appellant and RFKL entered into a Trust Assets Transfer Agreement (the Agreement) for the transfer of various assets (the Trust Assets) that were being held by the Appellant in Trust for RFKL. That pursuant to the agreement, the Trust Assets were transferred by the Appellant and the loan recognized by the Appellant was extinguished.

19. The Appellant stated that in its assessment, the Respondent noted that the value of the assets that were transferred by the Appellant to RFKL amounted to Kshs. 931,534,903. 00 while the value of the loans extinguished as consideration for the transfer of the trust assets amounted to Kshs. 1,248,334,234. 00. In this regard, the Respondent deemed the difference between the two amounts to be an income and subsequently charged income tax as computed below:Description Tax assessed (Kshs)

Consideration for the transfer of assets 1,248,334,234. 00

Actual value of the assets transferred 931,534,903. 00

Income deemed as trust income 316,799,331. 00

Income Tax @30% 95,039,799. 00

20. That the Respondent also issued a tax assessment in relation to WHT on the payment made by the Appellant on behalf of RFKL that attract WHT. The Respondent therefore issued a tax assessment of Kshs. 280,651,758. 00 made up as follows;Description Amount (Kshs)

Corporation Tax 95,039,799. 00

Withholding Tax 66,837,552. 00

Total Principal Tax due 161,877,352. 00

Penalties and Interest 118,774,406. 00

Total 280,651,758. 00

21. The Appellant submitted that the Respondent in its assessment failed to acknowledge the existence of a trust arrangement with the Appellant as trustee of the assets which it held on behalf of RFKL as beneficiary. It emphasised that trust arrangements are recognized under Kenyan law. That the Black’s law dictionary, 9th Edition defines a trust as the right, enforceable solely in equity to the beneficial enjoyment of property to which another holds legal title; a property interest held by one person (trustee) for the benefit of a third party (beneficiary).

22. That Jonathan Conder in ‘Trusts in Commercial Transactions’, defines a trust as a legal relationship created by a settlor, in lifetime or on death, when assets are placed under the control of a trustee for the benefit of a beneficiary, or for specified purpose. According to Jonathan Conder, a key characteristic of a trust is that it allows legal ownership and beneficial interest to be separated: the trustees become the owners of the trust property as far as third parties are concerned, and the beneficiaries can expect the trustees to manage the trust property for their benefit. Legal ownership by the trustee is said to involve holding the beneficial interest in the property for the beneficial owner. The beneficial owner of the land will have a right to the income from the property or a share in it, and a right to the proceeds of sale of the property or part of the proceeds. That the trustee is not entitled to this.

23. The Appellant explained that a trust does not confer a trustee the beneficial interest in a property. The trustee merely holds the trust assets for the benefit of a beneficiary and a transfer of a trust asset from a trustee to the beneficiary is not a sale because the trustee does not have a beneficial interest in the asset held in trust.

24. That by virtue of the agreement, the Appellant (as Trustee) acknowledged that it was holding various assets on behalf of RFKL (as Beneficiary). It added that the following provisions of the Agreement should be noted in this regard:a.In Recital A on Page 2, the parties acknowledge that the Trust assets were purchased by the Trustee (Appellant) and imported into Kenya on behalf of and for the benefit of the Beneficiary (RFKL).b.In Paragraph 2. 3, the Trustee (Appellant) is transferring the legal interest only (and not the beneficial interest) in the Trust Assets to the Beneficiary (RFKL); andc.In Paragraph 3. 1, it is important to note that the transfer of the trust assets simultaneously extinguishes the loans due from the Trustee (the Appellant) to the Beneficiary (RFKL).

25. That based on the provisions set out above, the Appellant averred that:a.The Appellant was never the owner of the trust assets and could therefore not pass any title to RFKL on the trust assets; andb.There was no gain acquired by the Appellant in respect of transfer of the trust assets.

26. The Appellant further averred that from the income tax perspective, transfers of assets would ideally be subject to capital gains tax (CGT) pursuant to the provisions of the Eighth Schedule to the ITA. That, however, Paragraph 5 recognizes the fact that transfers of assets between a person as a nominee or trustee for a person absolutely entitled as against a trustee are to be disregarded for purposes of computation of CGT. That Paragraph 6(g) of the Eighth Schedule continues to provide that:“the transfer by a trustee of property, which is shown to the satisfaction of the Commissioner to be subject to a trust, to a beneficiary on his becoming absolutely entitled thereto…” is not a “transfer” for purposes of the ITA.

27. The Appellant averred that based on the provisions of the ITA and specifically the Eighth Schedule as analysed above, a transfer of assets from a trustee to a beneficiary under a trust assets transfer agreement was not subject to income tax. The Respondent did not therefore have any legal basis for the assessment of income tax on the transfer of the assets from the Appellant as the trustee to RFKL as the beneficiary.

28. The Appellant emphasised that the transfer of assets did not result in any gain for the Appellant. That in the alternative, and without prejudice to the foregoing, it contended that there was no gain realized on the transfer of the assets to RFKL contrary to the allegations by the Respondent.

29. The Appellant stated that there was no dispute as to the funds received amounting to Kshs. 1,248,334,234. 00 which were expended by the Appellant during establishment of the farm and recognized as a loan. That the Respondent however alleged that the total value of loan extinguished through the agreement was Kshs. 1,248,334,234. 00 while the total value of assets transferred under the trust deed was Kshs. 913,534,903. 00 resulting in a variance of Kshs. 316,799,331. 00 for which the Respondent had levied income tax on.

30. The Appellant contended that the amount of Kshs. 316,799,331. 00 also comprises other expenses that were incurred in setting up the operations of RFKL by the Appellant. These expenses include, inter alia, casual wages, chemical and fertilizer, water, equipment hire, electricity and fuel. That these expenses were not claimed by the Appellant and were transferred to RFKL upon execution of the trust assets transfer agreement. They were then claimed by RFKL in the year of income 2014 as they were wholly and exclusively incurred in generating the income reported in the financial statements for the year of income 2014.

31. The Appellant averred that there was no gain realized on the transfer of the assets to RFKL and Mungai as the proprietor of the Appellant was only acting as employee of RFKL to fulfil his role which was initially to assist in the setting up of the operations of RFKL. The Appellant therefore contended that the Respondent erred in determining that there was a gain realized by the Appellant on the transfer of the trust assets that was subject to Income Tax.

32. The Appellant stated that the Respondent did not provide reasons for its decision contrary to Article 47 of the Constitution.

33. That in the alternative and without prejudice to the above, the Respondent’s tax assessment also lacks specificity as to the computation of the WHT demanded from the Appellant. That neither the Respondent’s tax assessment nor the objection decision provides reasons for WHT assessment issued against the Appellant. That a germane example was page 5 of the Respondent’s assessment where the Respondent demands for WHT amounting to Kshs. 28,799,519. 00 on account of royalties but does not specify what the royalties relate to. That it was important to note that no clarification was offered in the Respondent’s objection decision.

34. It added that another example was the demand of WHT amounting to Kshs. 6,833,599. 00 on account of an investment deduction expense as well as WHT amounting to Kshs. 31,204,435. 00 on account of capitalised assets. The Respondent did not illustrate the transactions to which these WHT assessments relate to and the Appellant has no way of understanding the basis of these assessment bearing in mind that the Appellant does not have any capitalised assets in its books of accounts, and it did not claim any investment deductions.

35. The Appellant submitted that Article 47 of the Constitution provides that every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair. That one of the tenets of fair administrative action is the right to be given written reasons before an administrative action is taken against a person by an administrative body. That in this regard, by failing to provide reasons for the WHT assessment, the Respondent had contravened the Appellant’s right to fair administrative action under Article 47 of the Constitution.

36. The Appellant averred that the WHT was beyond the five-year statutory time limitation for tax matters. According to the Appellant, the transactions giving rise to the assessment which forms the basis of this Appeal were conducted in the year 2014 and were default assessments based on Section 29 of the TPA. That Section 29(5) of the TPA provides that an assessment shall not be made after five (5) years immediately following the last date of the reporting period to which the assessment related. That Section 29(6) of the TPA provides an exception to this rule in cases of gross or wilful neglect, evasion or fraud by a taxpayer.

37. The Appellant asserted that the Respondent’s assessment was made in the year 2020, outside the time limit which an assessment for transaction that were made in the year 2014 would have been issued. That the Respondent had also not invoked the provisions of Section 29(6) of the TPA or provided a cogent reason why it should issue an assessment outside the time limit envisaged under TPA.

38. The Appellant averred that the transactions in question pertain to RFKL and not to the Appellant, and therefore would not have formed part of the Appellant’s tax computations or returns. That in addition, the time limit envisaged under Section 29(6) is not contingent on when a taxpayer files its return.

39. The Appellant therefore contended that the Respondent erred by issuing an assessment outside of the time limit envisaged under the TPA whilst not providing any cogent reason of why the assessment had been issued outside the time limit.

Appellant’s Prayers 40. The Appellant prayed for judgement/orders against the Respondent that;a.The Appeal be allowed with costs to the Appellant.b.The Objection decision of the Respondent dated 20th April 2021 demanding payment of Kshs. 280,651,757. 00 be set aside in its entirety.c.Any other orders that the Tribunal deems just and reasonable.

The Respondent’s Case 41. The Respondent’s case is premised on the Respondent’s Statement of Facts dated 5th July, 2021 and filed on 6th July, 2021 together with the documents attached thereto.

42. It was the Respondent’s contention that the Appellant was picked as an off shoot of Rainforest Farmlands Kenya Limited (RFKL) which was under audit. That from an interview held with the directors of RFKL, they explained that the company, RFKL acquired their assets from Duro Farms Limited with whom they had a trust agreement.

43. That it was further explained that Duro Farms had been trusted with the obligation of setting up a farm belonging to RFKL in Naivasha. It added that from the documents availed to the Respondent, it was noted that the Appellant was charged with initial responsibilities including scouting of land, setting up works to the full operationalization of the farm. This included the hiring of the contractors to set up the farm works and office spaces, entering into contracts with the breeders and planting the biological assets.

44. The Respondent explained that the Appellant had a trust transfer agreement with RFKL for the transfer of assets held by it to RFKL on 1st July, 2014. That the consideration for the transfer was Kshs. 1,248,334,234. 12 the amount was deemed as extinguishment of all loans owed to RFKL by the Appellant.

45. The Respondent stated that the Appellant did not declare any income from the services it provided to the beneficiary; RFKL, in contravention of Section 11(1) of the Income Tax Act. That in addition, RFKL did not deduct or pay withholding tax on any payments made to the contractors. The Respondent further stated that it had also written on several occasions requesting for details of the transaction and this was not availed.

46. It was the Respondent’s view that two issues emerged for determination namely:a.Whether tax was due on estimated Trust, andb.Whether Withholding tax on payments made to contractors is due on payments made by Duro Farms to the contractors.

47. According to the Respondent, the Appellant signed a transfer agreement with RFKL in the year 2014 where the Appellant transferred several assets held in trust to RFKL. That from the agreement, both parties acknowledged that the assets were purchased and or imported for the beneficiary (RFKL). That it was also evident that the Appellant had been charged with the responsibility of purchasing, developing of the flower farm, farm offices and cottages for the employees of the farm.

48. The Respondent averred that the total value of the assets transferred to RFKL was Kshs. 931,534,903. 00. That Schedule 1 of the Trust Agreement detailed all the assets transferred which included biological assets, farm houses and irrigation systems, the offices among others.

49. The Respondent explained that from the Trust Asset Transfer Agreement, it was noted that the consideration for the transfer of the assets shall be extinguished of all loans due from the trustee to the beneficiary. That the loan amount so extinguished by the transfer was Kshs 1,248,334,234. 12.

50. That in determination of the trust income, the Respondent took the difference between the values of the assets Kshs. 931,534,903. 00 transferred and the consideration of Kshs. 1,248,334,234. 12 and deemed the amount of Kshs. 316,799,331. 00 to be the value of the gain received by the trustee; Duro Farms (the Appellant) as a result of the trust agreement. The said trust income was subjected to Income Tax at 30%.

51. The Respondent submitted that from the trust agreement signed between the Appellant and RFKL, the assets transferred include dams, boreholes and irrigation systems, buildings, cottages, green houses & royalties.

52. That on the payment of the above expenses withholding tax was due and chargeable as the Appellant engaged the services of contractors like Gajipara Builders, Javva Green Projects from China who supplied and erected green houses, Sirrico Constructors who constructed the office blocks, grading hall among other contractor’s sample contracts and invoices. That no evidence of payment of withholding tax was given.

53. The Respondent therefore assessed withholding tax as follows:SUMMARY OF PRINCIPLE WITHHOLDING TAX DUE

Year/Total 2014(Kshs) 2015(Kshs) TOTAL(Kshs)

Withholding Tax From Royalties 34,255,063. 59 34,255,063. 59

Withholding Tax From Investment Deduction Expense 6,557,602. 25 275,996. 98 6,833,599. 24

Withholding Tax On Capitalised assets 23,023,480. 03 8,180,954. 52 31,204,434. 55

Total 63,836,145. 87 8,456,951. 50 72,293,097. 38

54. That in view of the foregoing, it was the Respondent’s considered view that the taxes outlined in its objection decision were raised in conformity with the provisions of the applicable laws and are due and payable from the Appellant.

55. The Respondent contended that the funds which RFKL sent to the Appellant for this project were recorded as loans in the Appellant’s books. That they were to repay these loans back to RFKL.

56. It added that the project was completed and RFKL having been successfully registered as a Kenyan company with a bank account desired to take ownership of the equipment and assets which the Appellant had allegedly acquired on its behalf. The total amount of money which RFKL had given the Appellant by the time the project was complete was Kshs. 1,248,334,234. 12. In the Appellant’s books this amount was indicated as money owed to RFKL.

57. The Respondent stated that the Appellant and RFKL transferred these assets using an instrument that was titled ‘Trust Assets Transfer Agreement’. That in essence, this instrument dated 1st July, 2014 purported to declare that the Appellant had up to that point been holding the assets as trustee on behalf of RFKL which was a beneficiary.

58. The Respondent averred that the instrument listed all the assets to be transferred to RFKL. These assets had a total value of Kshs. 931,534,903. 14. That under clause 3 of the transfer agreement, the consideration for the transfer of assets was extinguishment of all loans due from the Appellant to RFKL in the amount of the aforementioned Kshs. 1,248,334,234. 12.

59. That the Respondent was auditing RFKL when it learnt that it acquired its assets from the Appellant. The Respondent noticed that there was a variance between the value of the assets and the amount of the extinguished loan. The Respondent considered this variance which amounted to Kshs. 316,799,331. 00 as income earned by the Appellant for its services to RFKL. The Respondent charged 30% of this amount and found the Appellant liable for Income Tax of Kshs. 95,039,799. 00.

60. That in addition, it noticed that the Appellant had engaged the services of contractors but had failed to remit withholding taxes deducted on amounts paid to these contractors. That the withholding tax due amounted to Kshs. 66,837,552. 00.

61. Regarding the validity of the trust, the Respondent averred that the claimed trust, the Appellant was acting as the Trustee holding the acquired assets on behalf of RFKL as the beneficiary. That the reason why the Appellant was anxiously advancing this argument was so as to bring the transfer of the assets under exemption from income tax.

62. The Respondent argued that the Eighth Schedule provides for Capital Gains Tax which is tax charged on income from transfer of property. That the Appellant seeks to rely on the exemption in the Income Tax Act, Eighth Schedule, Paragraph 6(2)(g) which it cited.

63. The Respondent asserted that it was an uncontroverted fact that the Appellant failed to provide any instrument which created the alleged trust. That the only document which alluded to this trust was the one which seeks to transfer the assets. The instrument was titled ‘Trust Assets Transfer Agreement’. That in essence the document seeks to declare a trust relationship and end it at the same time. That it seeks to imply, after the fact, that the Appellant was a trustee and at the same time end this trust through the transfer of the assets.

64. The Respondent stated that the if trust did not arise from an express agreement between the parties, then it would fail the test of certainty of property. That at the time RFKL engaged the Appellant to transact on its behalf there were no specific assets belonging to RFKL which the Appellant was given to hold. On the contrary, what was envisioned by this agreement was that the Appellant would in future acquire some assets, which were yet to be specifically ascertained and identified and which did not belong to RFKL yet. That it was these unidentified assets that the Appellant would hold and later transfer to RFKL.

65. That even the total amount of money which the Appellant would hold in trust for the purposes of acquiring the assets could not be specifically ascertained at the earlier stages of the arrangement. That was why the only document which points to a supposed trust relationship, the ‘Trust Assets Transfer Agreement’, was prepared only at the conclusion of the alleged trust, because it was only then that the funds and the assets could fully and clearly be ascertained.

66. The Respondent insisted that it was at the time of making that transfer agreement that an express valid trust could have been made. That, however, the transfer agreement actually ended the fictional trust.

67. The Respondent averred that trusts have its roots in conveyancing. That it arises where a purchaser pays the price but the vendor is yet to deliver title to the property.

68. The Respondent further asserted in its submissions that there was no trust of any kind for the application of the exemption which the Appellant desperately seeks to rely on. That there was no express trust, and the Appellant cannot expect the Respondent to assume that there was a resulting or constructive trust.

69. It added that Paragraph 6(2)(g) applies if the Appellant establishes to the Respondent’s satisfaction that the property transferred was the subject of a trust. That the Appellant failed to establish to the satisfaction of the Respondent that the transferred assets were trust assets as claimed. As such the Appellant could not exclude the asset transfer from the transfers captured under the Eighth Schedule of the Income Tax Act.

70. Regarding the variance between the extinguished loan and the value of assets being taxable, the Respondent averred that since it had demonstrated that the assets were not trust assets, then it rightly demanded the income which arose from the transfer of these assets.

71. The Respondent contended that although the Appellant had suggested that this amount represented expenses like, wages, cost of equipment hired and cost of water and electricity, the Appellant had failed to provide particulars to show how the alleged costs were incurred. That the Appellant had merely named the expenses and attributed figures to them which add up to the entire difference between the money given to the Appellant by RFKL and the value of the assets.

72. That the Appellant had arranged its books to show that the Kshs 316,799,331. 00 was used to cater for expenses. That further the Appellant contended that it did not claim these expenses but transferred them wholly to RFKL which claimed the expenses in 2014.

73. It averred that the Appellant was essentially stating that it earned no income whatsoever for the services it rendered to RFKL. The Respondent stated that it reasonably found this questionable. That as such it required the Appellant to provide the particular receipts, invoices, statements and other documents which show that the expenses amounted to the alleged amount. That in this case the Appellant presented a general list of expenditures and income but no specific documents in support of the amounts.

74. That as such, the Appellant failed to discharge the burden of proving that the amounts received catered for expenses and were not taxable income. The Respondent further added that the Appellant failed to provide the necessary documentation to specifically show the amount of Withholding Tax which it was liable for and that such amount had specifically been paid for by RFKL.

75. The Respondent further submitted on the Appellant’s rights to a fair administrative action that it communicated the reasons for its findings, with the chief reason being that there was failure to provide the necessary documents.

76. Regarding the provisions of Section 29(5) of the TPA, the Respondent averred that the transactions for the year 2014 were to be reported in 2015. That it made an assessment on 21st April 2020 before five years immediately following the last date for reporting period had elapsed.

Respondent’s Prayers 77. The Respondent prayed that the Appeal be dismissed with costs to the Respondent.

Issues for Determination 78. The Tribunal upon due consideration of the pleadings and the written submissions filed on the separate parts of the parties was of the considered view that the Appeal herein raises the following issues for its determination, namely;a.Whether there are assessments that were in contravention of Section 29 of the TPA.b.Whether the Respondent erred in its assessments for withholding tax on the Appellant.c.Whether the Respondent erred in its assessment of Income Tax on the Appellant

Analysis and Determination 79. Having identified the issues falling for its determination, the Tribunal wishes to analyze the same separately as hereunder.

a. Whether there are assessments that were in contravention of Section 29 of the TPA. 80. It was the Appellant’s contention that the Respondent’s assessment was made in the year 2020, outside the time limit within which an assessment for transactions that were made in the year 2014 would have been issued. That the Respondent had also not invoked the provisions of Section 29(6) of the TPA or provided a cogent reason why it should issue an assessment outside the time limit envisaged under the TPA.

81. The Appellant averred that in addition, the time limit envisaged under Section 29(6) of the TPA is not contingent on when a taxpayer files its return. The Appellant therefore contended that the Respondent erred by issuing an assessment outside of the time limit envisaged under the TPA whilst not providing any cogent reason of why the assessment had been issued outside the time limit.

82. The Respondent on the other hand contended that the transactions for the year 2014 were to be reported in 2015. That it made an assessment on 21st April 2020 before five years immediately following the last date for reporting period had lapsed. The Respondent asserted that the transactions for the year 2014 were to be reported in 2015 and therefore the period of the assessment was valid.

83. Section 29(5) & (6) of the TPA provides as follows regarding time limits for assessments:“(5)Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.(6)Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.”(emphasis added)

84. Section 29(5) above while specifically indicating the five-year limit places emphasis on the reporting period. The reporting period for period ending 31st December, 2014 in respect to Income tax ended on 30th June 2015. The current assessments in this case were issued on 20th April 2020 which were well within 5 years. The Tribunal therefore finds that the Income tax assessments did not in any manner contravene the provisions of Section 29(5) of the TPA.

85. The Appellant had further stated that the WHT was beyond the five-year statutory time limitation for tax matters. According to the Appellant, the transactions giving rise to the assessment which forms the basis of its Appeal were conducted in the year 2014 and were default assessments based on Section 29 of the TPA. That Section 29(5) of the TPA provides that an assessment shall not be made after five (5) years immediately following the last date of the reporting period to which the assessment related.

86. The Respondent had averred that it noticed that the Appellant had engaged the services of contractors but had failed to remit withholding taxes deducted on amounts paid to these contractors. The withholding tax due amounted to Kshs. 66,837,552. 00.

87. The Tribunal noted that the transfer of the assets by the Appellant to RFKL were done via the Trust Assets Transfer Agreement dated 1st July 2014. The transactions relating to WHT were therefore prior to this date since they related to properties that had already been constructed.

88. Paragraph 8(1) of the Income Tax (Withholding Tax) Rules 2001 states as follows regarding the dates set for remittance of Withholding income tax to the Commissioner by a taxpayer;“On or before the twentieth day of the month following the month in which the deduction is made or before such other day as may be notified to him by the Commissioner, a person shall, subject to subparagraph (3), pay to the Commissioner or to such other person as the Commissioner may direct, all amounts of tax deducted in accordance with the Act and these rules.”

89. From the foregoing provision of the law therefore, it was the view of the Tribunal that since the WHT returns are done monthly and given that the assessments were done on 21st April 2020, the Respondent could not assess the same for the period prior to 20th April 2015 when the 5 year period allowed by law lapsed.

90. The Tribunal is bound to strictly enforce the provisions of taxing statutes as was stated in the case of Partington v AG [1869] LR 4 HL as follows:“As I understand the principle of all fiscal legislation it is this: if the 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. In other words, if there be admissible in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you simply adhere to the words of the statute.”

91. Consequently, the Tribunal finds that any withholding tax assessments prior to 20th April 2015 were in contravention of Section 29 of the TPA.

b. Whether the Respondent erred in its assessments for withholding tax on the Appellant. 92. Given that the Trust Assets Transfer Agreement was effective from 1st August 2014, and having entered the above finding that the WHT assessments prior to 20th April 2015 were in contravention of Section 29 of the TPA, the Tribunal finds that the Respondent erred in its assessment of Withholding Tax on the Appellant.

c. Whether the Respondent erred its assessment of Income Tax on the Appellant 93. It was the Appellant’s contention that in its assessment, the Respondent noted that the value of the assets that were transferred by the Appellant to RFKL amounted to Kshs. 931,534,903. 00 while the value of the loans extinguished as consideration for the transfer of the trust assets amounted to Kshs. 1,248,334,234. 00. In this regard, the Respondent deemed the difference between the two amounts to be an income and subsequently charged income tax as computed below:Description Tax assessed (Kshs)

Consideration for the transfer of assets 1,248,334,234. 00

Actual value of the assets transferred 931,534,903. 00

Income deemed as trust income 316,799,331. 00

Income Tax @30% 95,039,799. 00

94. The Appellant stated that the Respondent in its assessment failed to acknowledge the existence of a trust arrangement with the Appellant as trustee of the assets which it held on behalf of RFKL as beneficiary. It emphasised that trust arrangements are recognized under Kenyan law. That the Black’s law dictionary, 9th Edition defines a trust as the right, enforceable solely in equity to the beneficial enjoyment of property to which another holds legal title; a property interest held by one person (trustee) for the benefit of a third party (beneficiary).

95. It added that from the income tax perspective, transfers of assets would ideally be subject to capital gains tax (CGT) pursuant to the provisions of the Eighth Schedule to the ITA. That, however, Paragraph 5 recognizes the fact that transfers of assets between a person as a nominee or trustee for a person absolutely entitled as against a trustee are to be disregarded for purposes of computation of CGT. That Paragraph 6(g) of the Eighth Schedule continues to provide that:“the transfer by a trustee of property, which is shown to the satisfaction of the Commissioner to be subject to a trust, to a beneficiary on his becoming absolutely entitled thereto…” is not a transfer for purposes of the ITA.

96. The Respondent on its part contended that the Appellant was picked as an off shoot of Rainforest Farmlands Kenya Limited (RFKL) which was under audit. That from an interview held with the directors of RFKL, they explained that the company, RFKL acquired their assets from Duro Farms Limited with whom they had a trust agreement.

97. That in determination of the trust income, the Respondent took the difference between the values of the assets Kshs. 931,534,903. 00 transferred and the consideration of Kshs. 1,248,334,234. 12 and deemed the amount of Kshs. 316,799,331. 00 to be the value of the gain received by the trustee; Duro Farms (the Appellant) as a result of the trust agreement. The said trust income was subjected to income tax at 30%.

98. The Respondent added that from the trust agreement signed between the Appellant and RFKL, the assets transferred included dams, boreholes and irrigation systems, buildings, cottages, green houses & royalties.

99. From the submission of the parties it was not in dispute that there existed a trust between the Appellant and RFKL and that the funds received amounted to Kshs. 1,248,334,234. 00 which were expended by the Appellant during establishment of the farm and recognized as a loan. Indeed, the Respondent in its letter of findings recognised the existence of the trust when it stated in part as follows;“A. Undeclared Trust IncomeWe note that the company in the year 2014, signed a transfer agreement with Rain Forest Farm lands Limited. According to the agreement, Duro Farms transferred several assets held in trust to Rain Forest Lands Kenya.From the trust agreement, both parties acknowledge that assets were purchased and/or imported for the beneficiary (Rain Forest Farm Lands Kenya). It was also provided that Duro Farms Ltd had been charged with the responsibility of purchasing, developing of the flower farm, farm offices and cottages for the employees of the farm.”

100. The Appellant stated that the transfer of assets did not result in any gain for the Appellant.

101. The Appellant further explained that the amount of Kshs. 316,799,331. 00 also comprises other expenses that were incurred in setting up the operations of RFKL by the Appellant. That these expenses include, inter alia, casual wages, chemical and fertilizer, water, equipment hire, electricity and fuel. That these expenses were not claimed by the Appellant and were transferred to RFKL upon execution of the trust assets transfer agreement. That they were then claimed by RFKL in the year of income 2014 as they were wholly and exclusively incurred in generating the income reported in the financial statements for the year of income 2014.

102. The Tribunal perused through the Trust Assets Transfer Agreement between the Appellant and RFKL dated 1st July 2014 and noted that at Clause 12. 2 it states as follows;“All payments due to be made by the Beneficiary hereunder and all costs, charges and expenses or remuneration shall, unless expressly stated otherwise, be deemed to be exclusive of any VAT or similar tax charged or chargeable in respect thereof and for which the Beneficiary shall be liable to account”

103. Additionally, Paragraph 5(1) of the Eighth Schedule to the Income Tax Act provides as follows regarding dealings by nominees, trustees and liquidators;“In relation to any property held by a person as nominee for another person or as trustee for a person absolutely entitled as against the trustee (or for two or more persons who are so entitled in possession, whether as joint tenants or tenants in common), or as liquidator for any company, this Schedule shall apply as if the property were vested in, and the acts of the nominee, trustee or liquidator in relation to the property were the acts of the person or persons for whom the person is nominee, trustee or liquidator (transfers between the person or persons and the nominee, trustee or liquidator being disregarded accordingly).”

104. From the aforementioned clause in the Trust Assets Transfer Agreement and as provided in Paragraph 5(1) to the Eighth Schedule to the ITA, it was clear to the Tribunal that the beneficiary (RFKL) was to meet all the costs associated to the development of the assets. The Tribunal further noted that the Respondent had the benefit of having audited RFKL and therefore had the knowledge of all these documents and the claims made by RFKL in 2014 regarding any expenses as averred by the Appellant.

105. As stated in Russel v. Scott, [1948] 2 All ER 1 “the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax on him”,

106. Similarly, in T.M. Bell v Commissioner of Income Tax [1960] EALR 224 Roland J. Stated:“…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.”

107. Going by the foregoing analysis the Tribunal finds that Respondent erred its assessment of income tax on the Appellant.

Final Decision 108. The upshot of the foregoing is that the Appeal is merited and the Orders that recommend themselves to the Tribunal are as follows;a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 20th April, 2021 be and is hereby set aside.c.Each party to bear its own costs.

109. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF MAY, 2023. ..............................................ERIC N. WAFULACHAIRMAN..............................................CYNTHIA B. MAYAKA GRACE MUKUHAMEMBER MEMBER..............................................JEPHTHAH NJAGI ABRAHAM K. KIPROTICHMEMBER MEMBER