[2024] KETAT 1323 (KLR)

Haria v Commissioner of Domestic Taxes (Tax Appeal E518 of 2023) [2024] KETAT 1323 (KLR) (6 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1323 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E518 of 2023

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & G Ogaga, Members

September 6, 2024

Between

Nishil Asvin Haria

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

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

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. The Authority is an agency of the Government established for the purposes of assessing, collecting and accounting for tax revenues.

3. The Appellant made an application to transfer of his shares from Harleys Limited and subsequently self-assessed and made payments in relation to Capital Gains Tax (CGT) on 30th December 2022.

4. The Respondent issued the Appellant with a Pre-assessment demand notice for the sum of Kshs 13,011,451. 00 in relations to CGT on 6th June 2023.

5. The Appellant replied vide a letter dated 7th June 2023 objecting to the Respondent’s demand notice. The Respondent issued the assessment vide a letter dated 20th June 2023.

6. The Appellant objected to the assessment vide a letter dated 23rd June 2023. Subsequently, the Respondent issued its objection decision on 27th July 2023 confirming the assessments.

7. Aggrieved by the Respondent’s decision to confirm the assessment, the Appellant filed the Notice of Appeal on 9th August 2023.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 23rd August 2023 and filed on 25th August 2023:a.That the Respondent failed to appreciate that the subject transfer was not undertaken in the year 2023 but rather in the year 2022 when the rate of Capital Gains Tax applicable was 5% and not 15% as alleged in the impugned assessment.b.That the Respondent erred in law and in fact in failing to appreciate the cardinal principle in law that, the law does not apply in retrospect.c.That the Respondent erred in law and in fact in averring that the Respondent could on one hand receive monies in one year but impose taxes as per the rate of the subsequent year. It is not only unlawful but also unconstitutional and unreasonable.d.That the Respondent erred in law and in fact in failing to appreciate that the tax regime in place at the time of the transaction is self-declaratory in nature and taxes are due at the point of self assessment by a taxpayer and payment to the Respondent.e.That the Respondent erred in law and in fact in its interpretation of the Paragraph 11A of the Eighth Schedule of the Income Tax Act, which is inapplicable, as the Appellant made a self-declaration and remitted taxes to the Respondent.f.That the Respondent erred in law and in fact in failing to appreciate that the Commissioner is required to assess income chargeable to tax expeditiously under Section 73 of the Income Tax Act.g.That the Respondent erred in law and in fact in making a finding that the date of franking of the transfer deed by the Collector of Stamp duty was commensurate to the 'tax point' for the purposes of CGT whereas taxes were received by the Commissioner prior to the date of franking.h.That Respondent erred in law and in fact in failing to appreciate that where an Appellant lodges documents with a Government entity for a transaction as was the case herein, then any delay by the Government entity in lodging and/or registering the documents cannot be attributed to the Appellant.i.That the Respondent erred in law and in fact in its interpretation of Section 23 of the Income Tax Act, which is unconstitutional as it, accords unfettered discretion to the Commissioner and obviates any predictability in a tax regime contrary to Fair Administrative Action in tax.j.That the Respondent fell in error by misapprehending the juridical nature of the transaction as well as the doctrine of tax avoidance which resulted in an incorrect calculation of purportedly wrongly assessed CGT.k.That the impugned tax decision is arbitrary and erroneous, and the Respondent lacks legal or factual basis as the Appellant has duly paid all taxes as required by statute.l.That the Respondent erred in law and in fact in failing to appreciate the principles in taxation to the effect that tax legislation must be interpreted strictly and any ambiguity in tax ought to be interpreted in favour of the taxpayer.m.That the Respondent erred in law and in fact in failing to appreciate that the Appellant did not violate any tax laws and strictly complied with all relevant laws in his computation of CGT.n.That the impugned tax decision and impugned assessment violates the Appellant's Constitutional right to transparency, accountability, legitimate expectation, fair administrative action in tax administration, right to protection of law all contrary to Articles 10, 47 and 48 of the Constitution of Kenya.o.That by purporting to confirm the impugned assessment in the impugned decision the Respondent acted ultra vires its powers in excess of its jurisdiction as ascribed by law.

Appellant’s Case 9. The Appellant’s case is premised on the hereunder filed documents before the Tribunal:i.The Appellant’s Statement of Facts dated 23rd August 2023 and filed on 25th August 2023 together with the documents attached thereto.ii.The Appellant’s written submissions dated 31st May, 2024 and filed on the same date.

10. The Appellant submitted that on or about the year 2021 the company's leadership commenced discussions on its restructuring as a company. That the transaction whose prospects were discussed over time subsequently crystallized in the opening of a subsequent company.

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

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

13. The Appellant averred that on 6th June 2023 however, the Respondent issued a pre-assessment demand notice for the sum of Kshs. 13,011,451. 00 to the Appellant on the assertion that the Capital Gains Tax was payable at the rate of 15% and not 5%.

14. That in the foregoing letter the Respondent admitted that the Appellant made the payment by 30th December 2022 at the rate of 5% but holds the erroneous position that the acquisition of shares in the company took place in February 2023.

15. That this position was erroneous because the statutory payments were made in December 2022 well within the lawful timelines. That it was only in February 2023 that the news of the transaction was reported to the general public in the Business Daily newspaper.

16. That moreover, it was not only unlawful but utterly unfair and contrary to fair administrative action for the Respondent to duly receive and acknowledge taxes on one hand then further assess additional taxes on the Appellant on the premise that the tax already paid was due in a subsequent year.

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

18. That on 7th June 2023 the Appellant responded to the pre-assessment notices noting that the share transfers were done on 30th December 2022 and not 13th February 2023 as alleged by the Respondent.

19. That on 20th June 2023 the Respondent issued an assessment order to the Appellant wherein the assessed liability was the sum of Kshs. 13,011,451. 00.

20. The Appellant stated that the Respondent requested for immediate payment failure to which it would enforce collection under Section 42 of the Tax Procedures Act.

21. That aggrieved with the foregoing impugned demand the Appellant objected to the assessment order on 23rd June 2023 and tendered its objection through its counsel on record as per the provisions of the Tax Procedures Act.

22. That on 27th July 2023 the Commissioner issued an objection decision wherein a finding was made that the liability of Kshs. 13,011,451. 00 was due and owing from the Appellant.

23. It was the Appellant’s contention that the Respondent failed to appreciate that the subject transfer was not undertaken in the year 2023 but rather in the year 2022 when the rate of Capital Gains Tax applicable was 5% and not 15% as alleged in the impugned assessment.

24. That the Respondent erred in law in its interpretation of the Finance Act 2022 which amended Section 34(1)(1) of the Income Tax Act and failed to appreciate the cardinal principle in law that, the law does not apply in retrospect. That the argument in the impugned decision and impugned assessment notice are not only unconstitutional but also impractical and unreasonable.

25. That the Respondent erred in law and in fact in its interpretation of the Paragraph 11A of the Eighth Schedule of the Income Tax Act as to what constitutes the 'tax point' in this matter and/or when tax is said to be due.

26. That the Respondent erred in fact in making a finding that the date of franking of the transfer deed by the Collector of Stamp duty was commensurate to the 'tax point' for the purposes of Capital Gains Tax.

27. That Respondent erred in law and in fact in failing to appreciate that where an Appellant lodges documents with a Government entity for a transfer as was the case herein, then any delay by the Government entity in lodging and/or registering the documents cannot be attributed to the Appellant.

28. That the Respondent erred in law and in fact in its interpretation of Section 23 of the Income Tax Act and the assertion that the Appellant formed a related party in a design to avoid tax or reduce liability to tax.

29. That the Respondent fell in error by misapprehending the juridical nature of the transaction which resulted in the subject transfer thereby making an incorrect calculation of purportedly wrongly assessed Capital Gains Tax.

30. That the impugned tax decision was arbitrary and erroneous, and the Respondent lacked legal or factual basis as the Appellant duly paid all taxes as required by statute.

31. That the Respondent erred in law and in fact in failing to appreciate the principles in taxation to the effect that tax legislation must be interpreted strictly and any ambiguity in tax ought to be interpreted in favour of the taxpayer.

32. That the Respondent erred in law and in fact in failing to appreciate that the Appellant did not violate any tax laws and strictly complied with all relevant laws in his computation of Capital Gains Tax.

33. That the impugned tax decision and impugned assessment violated the Appellant's Constitutional right to transparency, accountability, legitimate expectation, fair administrative action in tax administration, right to protection of law all contrary to Articles 10, 47 and 48 of the Constitution of Kenya.

34. That by purporting to confirm the impugned assessment in the impugned decision the Respondent acted ultra vires its powers in excess of its jurisdiction as ascribed by law.

Appellant’s Prayers 35. The Appellant prayed that the Tribunal;a.Allows this Appealb.Annuls the impugned decision as well as the impugned assessment.c.Award the cost of this Appeal to the Appellant.

Respondent’s Case 36. The Respondent’s case is premised on the hereunder filed documents before the Tribunal:i.The Respondent’s Statement of Facts dated 28th September 2023 and filed on the same date.ii.The Respondent’s written submissions dated 7th December, 2023 and filed on 8th December, 2023.

37. The Respondent stated that the Appellant was a shareholder of Harleys Limited, a company registered in Kenya and whose operations were all throughout the East African region. That the Appellant was also a shareholder of Westlands Heights a Company registered in Mauritius in 2022. That both Companies were owned by the same shareholders.

38. That the Appellant commenced the transfer of shares in December 2022 from Harleys Limited to Westlands Heights Limited. That however, the sale was concluded in 2023 when Capital Gains Tax rate had changed from 5% to 15%. That a variance of Ksh 13,011,451. 00 was established.

39. That on 6th June 2023, the Appellant was issued with a pre-assessment notice notifying him of the return review findings and advising him to address the same to reflect the correct position failure to which additional assessments would be issued on the same.

40. That on 7th June 2023, the Appellant responded to the assessment notices noting that the share transfers were done on 30th December 2022 and not 13th February 2023.

41. That on 20th June 2023, the Respondent issued an Assessment Order to the Appellant wherein the assessed liability was Ksh 13,011,451. 00. That the Appellant objected to the Assessment Order on 23rd June 2023.

42. That the Respondent issued an objection decision on 27th July 2023 where a tax liability of Ksh 13,011,451. 00 was confirmed.

43. The Respondent asserted that the Appellant's claim was inaccurate. That the additional assessment was issued in accordance with the provisions of the tax laws.

44. The Respondent submitted that examination of the acknowledgement receipt for transactions declared by one Kumar Haria (the Appellant's fellow shareholder) indicated that he was transferring shares to Harleys Limited whereas the agreement shows that he was transferring shares to Westlands Height Limited. That it was difficult for the Respondent to ascertain whether the CGT payment slips issued and paid for related to the transaction between the Appellant and Westlands Height limited.

45. The Respondent averred that on 30th December, 2022 the Appellant and other two shareholders transferred shares in Harleys Limited to Westlands Heights Limited which is also owned by the three shareholders.

46. It was the Respondent’s contention that under the provisions of the Income Tax Act, CGT was payable under this transaction. That the three shareholders filed the CGT returns and made payment on the same day i.e. 30th December 2022 at the rate of 5%.

47. That the transfer deed presented was however franked by Collector of stamp duties on 4th January 2023. That according to Paragraph 11A of the 8th Schedule of the Income Tax Act, the 'tax point'/due date in relation for CGT payment is the date of registration of an instrument in favour of the transferee.

48. It submitted that it was worth to note that acquisition of the shares in Westlands Heights took place on 13th February 2023. That the Appellant consequently made a Capital gain in February 2023 upon agreement of sale of the shares hence CGT was payable at the rate of 15%.

49. That pursuant to the provisions of Section 23 of Income Tax Act, transfer occurs when property is sold, exchanged, conveyed or disposed in any manner. The Respondent asserted that the due date (tax point) for Capital Gains Tax was upon registration of the transfer of registration instrument in favour of the transferee.

50. That the Finance Act, 2022 amended Section 34(1)(j) of the Income Tax Act to increase the Capital Gains Tax rate in Kenya from 5% to 15% with effect from 1st January 2023.

51. That it was worth to note that Westlands Limited, the company that the Appellant was transferring the shares to was incorporated on 26th October 2022 in Mauritius.

52. The Respondent averred that formation of Westland Heights a related Company and the haste in payment of CGT before the lapse of the year 2022 to avoid tax/reduce tax liability was in contravention of Section 23 of the Income Tax Act.

Respondent’s Prayers 53. The Respondent prayed that the Tribunal finds:a.That the Respondent’s decision dated 27th July 2023 be upheld.b.The confirmed assessments were proper in law.c.That the Appeal herein be dismissed with cost to the Respondent.

Issue For Determination 54. The Tribunal upon due consideration of the pleadings and the written submissions filed by the parties was of the view that the Appeal herein raises a single issue for its determination namely;Whether the Respondent was justified in assessing the Appellant’s CGT using the rate of 15%.

Analysis And Determination 55. The Tribunal having appropriately ascertained the issue that falls for its determination shall proceed to make analysis as hereunder.

56. The genesis of this dispute is the Respondent’s assessment of CGT using the rate of 15% that was applicable from January 2023 as opposed to the Appellant’s earlier self-assessment at the rate of 5% which was applicable until December 2022.

57. The Appellant was among shareholders who transferred their shares in Harleys Limited to a private holding company incorporated in Mauritius.

58. It is not in dispute that that CGT was chargeable at the rate of 5% up to December 2022, and the law changed the rate to 15% from January 2023. It was further not in dispute that the Appellant commenced the process of transfer of shares in the year 2022 and subsequently self-assessed and paid CGT at the rate of 5% on 30th December 2022.

59. The Respondent subsequently assessed the CGT based on the date of transfer instruments in favour of the transferee which was done in 2023 when CGT was at the rate of 15%.

60. It was the Appellant’s contention that the Respondent failed to appreciate that the subject transfer was not undertaken in the year 2023 but rather in the year 2022 when the rate of Capital Gains Tax applicable was 5% and not 15% as alleged in the impugned assessment.

61. That the Respondent erred in law its interpretation of the Finance Act 2022 which amended Section 34(1)(j) of the Income Tax Act and failed to appreciate the cardinal principle in law that, the law does not apply in retrospect. That the argument in the impugned decision and impugned assessment notice are not only unconstitutional but also impractical and unreasonable.

62. That the Respondent erred in law and in fact in its interpretation of the Paragraph 11A of the Eighth Schedule of the Income Tax Act as to what constitutes the 'tax point' in this matter and/or when tax is said to be due.

63. The Respondent on the other hand held the view that the sale was concluded in 2023 when Capital Gains Tax rate had changed from 5% to 15%. That a variance of Ksh 13,011,451. 00 was established.

64. That the transfer deed presented was franked by the Collector of stamp duties on 4th January 2023. That according to Paragraph 11A of the 8th Schedule of the Income Tax Act, the 'tax point'/due date in relation for CGT payment is the date of registration of an instrument in favor of the transferee.

65. It submitted that it was worth to note that acquisition of the shares in Westlands Heights took place on 13th February 2023. That the Appellant consequently made a Capital Gain in February 2023 upon agreement of sale of the shares hence CGT was payable at the rate of 15%.

66. That pursuant to the provisions of Section 23 of Income Tax Act, transfer occurs when property is sold, exchanged, conveyed or disposed in any manner. The Respondent asserted that the due date (tax point) for Capital Gains Tax was upon registration of the transfer of registration instrument in favour of the transferee.

67. The point of departure between the Appellant and the Respondent is whether the payment of CGT is subject to the tax point upon registration of the transfer document, or upon application for registration of transfer.

68. The thrust of the Appellant’s contention on this issue is that the self-assessed CGT was instructed by Paragraph 11 A of the Eighth Schedule of the ITA, and that the transaction was materially complete by December 2022, and hence not under the taxing purview of the new rate of CGT which became effective in January 2023.

69. That in the case of Law Society of Kenya vs. Kenya Revenue Authority & AG, the High Court stated that where a transfer of a property has not taken place, then one cannot be said to have made a gain that is capable of being taxed, conversely, if a loss is made, then there would be no expectation that any tax would be payable by the owner of the property upon its transfer.

70. The charging clause in respect of the CGT (ITA) is Section 3 (2) (f) which provides that;“Subject to this Act, income upon which tax is chargeable under this Act is income in respect of gains accruing in the circumstances prescribed in, and computed in accordance with the Eighth Schedule.”

71. Paragraph 2 of the Eighth Schedule provides as follows;“the income in respect of which tax is chargeable under section 3 (2) (f) is the whole of a gain which accrues “on the transfer” of a property in Kenya.”

72. Paragraph 6 (1) (a) of the Eighth Schedule to the ITA provides;“Subject to this schedule there is transfer of property for the purposes of this schedule when property is sold, exchanged, conveyed, or otherwise disposed of in any manner whatsoever (including by way of a gift), whether or not for consideration.”

73. Paragraph 11A of the Eighth Schedule to the Income Tax Act provides as below:“The due date for tax payable in respect of property transferred under this Part shall be on or before the date of application for transfer of the property is made at the relevant Lands Office.”

74. In the Land Registration Act, which is the principle statute under which registrable instruments in land are registered, a “transfer” is defined as passing of an estate in land or interest in land or lease under this Act, whether for valuable consideration or otherwise.

75. Section 37 (2) of the Land Registration Act provides that;“(2)A transfer shall be completed by –a.Filing the instrument;b.Registration of the transferee as the proprietor of the land, lease or charge”.

76. The foregoing clarifies the meaning of the word transfer, which two ingredients are met, namely, application for transfer by filing of the instrument, and secondly the actual registration of the transferee as the new proprietor.

77. The Tribunal reiterates its finding in TAT NO. E558 OF 2023 Rupen Mulchand Haria Ltd Vs. Commissioner Of Domestic Taxes where its stated as follows at paragraph 116;“The foregoing provision bring to mind that, requiring the transferor to pay CGT before the registration of the transfer essentially means that tax is payable before it has become legally due, which would be an illegality.”

78. It is further noteworthy that Paragraph 11A of the Eighth Schedule to the ITA which has been relied upon by the Appellant, requires that CGT to be paid upon presenting the transfer as opposed to upon registration of the transfer, the effect being that tax is payable before the transfer. In LSK vs. KRA & AG (2017) (Supra), the High Court found this provision infringed on the vendors’ and purchasers’ right to property and declared the provision unconstitutional on 14th March 2017, to the extent that;“it purports to impose an obligation on a taxpayer to pay Capital Gains Tax on or before presenting the transfer instrument for registration, instead of, upon registration of the transfer instrument in favour of the transferee.”

79. As noted in TAT NO. E558 OF 2023 Rupen Mulchand Haria Ltd Vs. Commissioner Of Domestic Taxes, it is clear that the Appellant based its assessment of CGT made in December 2022 on a statutory provision which had since been declared unconstitutional by the Constitutional Court.

80. Given that it was a common fact that the registration of the transfer was done in 2023, it follows that the applicable CGT for 2023 was 15%. The Respondent did not therefore fall into error when it determined that the CGT rate applicable to the Appellant was the rate of 15%.

Final Decision 81. The upshot of the foregoing analysis is that the Appeal lacks merit. Accordingly, the Tribunal makes the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated July 27, 2023 be and is hereby upheld.c.Each Party to bear its own costs.

82. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 6THDAY OF SEPTEMBER, 2024ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBERGLORIA A. OGAGA - MEMBER