[2024] KETAT 845 (KLR)

Haria v Commissioner of Domestic Taxes (Tax Appeal E558 of 2023) [2024] KETAT 845 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 845 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E558 of 2023

RM Mutuma, Chair, EN Njeru, M Makau, B Gitari & AM Diriye, Members

June 28, 2024

Between

Rupen Mulchand Haria

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is an individual taxpayer citizen of the Republic of Kenya and a shareholder of Harleys Limited, a company registered in Kenya and whose operations are all throughout East African region.

2. The Respondent is the principal officer appointed under then Kenya Revenue Authority Act and mandated with the responsibility for the assessment, collection, and accounting for all tax revenue on behalf of the Government of the Republic of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statues set out in the schedule to the Act.

3. The background to this dispute arose from the demand letter issued by the Respondent to the Appellant on 5th June 2023 demanding payment of Kshs. 286,252,032. 00 being undeclared due taxes.

4. On 21st June 2023 following various correspondence between the Appellant and the Respondent, the Appellant issued a notice of assessment demanding payment of the sum of Kshs. 416,966,484. 00 to the Appellant on the basis that Capital Gains Tax was payable at the rate of 15% and not 5%.

5. Aggrieved by the notice of assessment, the Appellant objected to the same on 23rd June 2023 and the Respondent rendered its Objection Decision on 27th July 2023 making a finding that a tax liability of Kshs. 416,966,484. 00 was due and owing from the Appellant on account of Capital Gains Tax.

6. Dissatisfied with the said Objection Decision the Appellant preferred the Appeal herein to the Tribunal by Notice of Appeal dated 21st August 2023 and filed on.5th September 2023.

The Appeal 7. The Appellant lodged the Memorandum of Appeal dated 4th September 2023 with the Tribunal on 5th September 2023 and set out the following grounds of appeal: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 fact in failing to appreciate the cardinal principal in law, that the law does not apply in retrospect.c.That the Respondent erred in law and fact in averring that the Respondent could on one hand receive monies in one year but impose taxes as per the rate if the subsequent year. It is not only unlawful but also unconstitutional and unreasonable.d.That the Respondent erred in law and fact in failing to appreciate that the tax regime in place at the time of the transaction was 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 fact in its interpretation of paragraph 11 A of the Eighth Schedule of the Income Tax Act, which is inapplicable, as the Appellant made self -declaration and remitted taxes to the Respondent.f.That the Respondent erred in law and fact in its interpretation of what constitutes a ‘tax point’ as well as determination of Constitutional Court in the case of Law society of Kenya vs. Kenya Revenue Authority & Anor (2017).g.That the Respondent erred in law and 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.h.That the 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 fell in error in misconstruing two independent transactions between the Appellant and Westlands Heights Limited and independent third parties, IBL Limited, as well as IBL’s subsidiary Elgon Healthcare Limited.j.That the Respondent erred in law and fact in placing reliance on purported investor communication from IBL Ltd to the public and inferring that a transfer occurred in 2023. k.That the Respondent erred in law and fact in failing to appreciate that the transaction between Westlands Heights Ltd incorporated in Mauritius and IBL Ltd (and or its subsidiaries) is independent to the transaction relating to the payment of CGT to the Respondent.l.That the Respondent fell in error in law and failing to appreciate that Harleys Limited and Westlands Heights Limited are two separate legal entities.m.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 the incorrect calculation of purportedly wrongly assessed CGT.n.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.o.That the Respondent erred in law and 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.p.That the Respondent erred in law and fact in failing to appreciate that the Appellant did not violate any tax laws and strictly complied with all relevant laws in their computations of CGT.q.That the impugned tax decision and impugned assessment violates the Appellant’s constitutional right to transparency, accountability, legitimate expectation, fair administrative action, right to protection of laws all contrary to Articles 10, 47, and 48 of the Constitution of Kenya.r.That by purporting to confirm the impugned assessment in the impugned decision the Respondent acted ultra vires its powers in excess of its powers as ascribed by law.

The Appellant’s Case 8. The Appellant’s case is set out on his;a.Statement of Facts dated 4th September 2023 and filed on 5th September 2023 together with the documents attached thereto; and,b.Written submissions dated 16th January 2024 and filed on 17th January 2024.

9. The Appellant stated that on or about the year 2021 Harleys Limited (the company) commenced its restructuring as a company and the transaction whose prospects were discussed over time subsequently crystallized in the opening of a subsequent company known as Westlands Heights Limited which is incorporated in Mauritius.

10. The Appellant stated that in carrying out the foregoing transaction the Appellant self assessed the various statutory payments, ensured all the registrable instruments were lodged with the respective Government agencies and subsequently remitted various statutory payments in compliance with the various laws. That the various payments included CGT, all of which was remitted by the Appellant on 30th December 2022 and were duly received by the Respondent on the said date.

11. The Appellant also stated that the transaction, which is the subject of this Appeal, is independent from subsequent transactions between Westlands Heights Ltd and IBL Limited and any of its subsidiaries.

12. On 5th June 2023 the Respondent issued to the Appellant a demand for alleged under declared taxes following various correspondence with the Appellant and sought payment of the sum of Kshs. 286,252,032. 00 being alleged tax due.

13. He posited that from the foregoing, it is important to note that, the Respondent construes the Appellant herein, Harleys Limited and Westlands Heights Limited as one and the same and synonymously indicates Westlands Limited in parenthesis while referring to the Appellant yet the two are separate legal entities.

14. He further stated that following various correspondence between the Appellant and the Respondent, on 21st June 2023, the Respondent issued him with Notice of Assessment of CGT in the sum of Kshs. 416,966,484. 00 demanding payment thereof, on the basis that CGT was payable at the rate of 15% and not 5%.

15. The Appellant stated that the basis of the Respondent’s assessment is skewed owing to the fact that it relies on communication between a third party, IBL Limited, who was not a party to the transaction.

16. The Appellant contended that the foregoing error resulted in the Respondent’s assumption that the transaction occurred in 2023 whereas the Appellant made all statutory payments in December 2022. That it was only in February 2023 that the news of a subsequent transaction, which is not subject of this Appeal, was reported to the general public in the Business Daily Newspaper.

17. The Appellant also asserted that it is not only unlawful but utterly unfair and contrary to fair administrative action for the Respondent to duly receive and acknowledge taxes on one hand, then further assess additional taxes on the Appellant on the premise that the tax already paid was due in a subsequent year and rely on a completely different transaction to found its claim.

18. The Appellant contended that the Respondent holds the wrongful presumption that the transfer instrument was executed on 4th January 2023 and places reliance on communication with a wholly different and independent third-party being IBL Limited (and/or its subsidiaries) without bearing in mind that in Kenya, tax is payable at the point of a self-assessment and declaration by a tax payer.

19. Aggrieved by the aforesaid notice of assessment, the Appellant objected to the same on 23rd June 2023, and the Respondent rendered its Objection Decision on 27th July 2023, wherein it made a finding that the tax liability of Kshs. 416,966,484. 00 was due and owing from the Appellant.

20. The Appellant stated that the basis of the Objection Decision as per its statement of findings was as follows:“We have taken judicial notice of the fact that the High Court of Kenya had since annulled the legality of paragraph 11A of the Eighth Schedule in the administration of capital gains tax but more so in the instruction of the tax point. Consequently, we find that Rupen Mulchand Haria incorrectly relied on an unconstitutional provision in assessing the payable capital gains tax.”

21. The Respondent averred that the aforesaid finding erred in failing to make various factual and legal provisions, and aggrieved by the Respondent’s findings and Objection Decision filed the appeal herein challenging the entire decision of the Respondent as per the grounds set out seriatim in the Memorandum of Appeal herein.

22. In his submissions, the Appellant submitted that in February 2021, the company’s leadership commenced discussions on its restructuring, and noted that he has availed evidence that the transaction’s prospects were discussed over time and subsequently crystallized in the opening of a subsequent company.

23. It was a submission of the Appellant that the Directors of Harleys Limited, such as the Appellant herein were following a board Resolution required to transfer shares to a holding company incorporated in Mauritius to facilitate the necessary restructuring. It is thus the transfer of shares from the Appellant to the holding company, that is the subject of this Appeal.

24. The Appellant submitted that contrary to the Respondent’s assertions made in the letter dated 21st June 2023, all subsequent transactions relating to the acquisition of the holding company by a third party cannot and ought not to form the basis of the arguments raised herein as they relate to a different jurisdiction altogether and the Tribunal should from the onset limit itself to the primary transaction.

25. The Appellant further submitted that in carrying out the foregoing transaction, the Appellant self-assessed the various statutory payments, and 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. He submitted that the various payments included stamp duty as well as CGT, all of which were remitted by the Appellant before 30th December 2022 and were duly acknowledged by the Respondent on the said date.

26. The Appellant also submitted that in reference to the Respondent’s letter dated 5th June 2023 making a demand for the sum of Kshs. 286,252,032. 00 as underdeclared CGT, the Appellant submitted that the provisions of Sections 9 (1) and 13 (4) of the Banking Act are not relevant to the matter as neither the Appellant nor Harleys Limited are a financial institution and reiterated that the company was in the business of distribution of pharmaceutical products.

27. The Appellant further submitted that the Respondent’s notice of 21st June 2023 relies upon the provisions of paragraph 11A of the Eighth Schedule of the Income Tax Act as well as the determination of the High Court in Law Society of Kenya vs. Keya Revenue Authority & the AG (2017), and asserts that the court in the case guided on the interpretation of the section, and urged the Tribunal to take judicial notice that the court rendered the section unconstitutional and which for all intents and purposes cannot be relied on as it was found to be null and void.

28. The Appellant submitted that in Kenya the taxation system is self-declaratory in nature and therefore any of the Respondent’s arguments on what constitutes a tax point unwarranted and contrary to the law.

29. It was a further submission of the Appellant that the Respondent in the notice of 21st June 2023 wrongly relied on IBL Ltd.’s investor’s communication which is submitted is of no relevance to the transaction in which, the simple question the Tribunal ought to ask is, whether the Appellant remitted the CGT as required by law? And submitted that the answer to this question is in the affirmative, and any subsequent transactions are not and ought not to be the subject of the instant Appeal.

30. The Appellant also submitted that a newspaper publication as cited by the Respondent cannot be used as evidence of the time in which a transfer took place and if anything, there is no evidence tendered by the Respondent to support its allegations.

31. In another submission, the Appellant stated that it is not in dispute that CGT was chargeable at the rate of 5 % up to until December 2022 and the law changed the rate to 15 % in 2023. It is also not in dispute that the payments were remitted to KRA in December 2022.

32. It was also submitted that the point of difference arises from the wrongful allegation by the Respondent and a fundamental misrepresentation of the law that CGT is payable at the point of registration of a transfer instrument.

33. The Appellant submitted on whether the Respondent failed to appreciate the legal underpinnings of the applicable law of self -assessment in Kenya, and stated that a tax is due at the time when a self-assessment is made by the taxpayer which is what the law states in Section 28 (1) of TPA;“A taxpayer who has submitted a self-assessment return in the prescribed form for a reporting period shall be treated as having made an assessment of the amount of tax payable (including a nil amount) for the reporting period to which the return relates being the amount set out in the return.”

34. It was submitted that the Appellant made a self-assessment on 30th December 2022 and the tax period as captured on page 28 of the Appellant’s bundle of documents is December 2022.

35. It was further submitted that of importance to note was that the CGT in the period of December 2022 was assessed at 5% of the computed gains, and it was therefore illogical and extremely unfair for the Respondent to hold a peculiar view and insist that the self-assessment which is legally in the purview of the taxpayer ought to have been made in a different taxing period so as to attract more taxes, despite clear legal provisions.

36. The Appellant further submitted that there was no evidence to support why or how the Respondent wishes to force the Appellant to self-declare the taxes in 2023, when such a self-declaration would be punitive to the Appellant to pay an additional 10 % following the amendment of the rate of CGT from 5% to 15% effective from the year 2023.

37. In light of the foregoing the Appellant submitted that the assessment by the Respondent in the sum of Kshs. 416,966,484. 00 is not only disproportionate but also illegal because the Respondent had gone beyond the relevant taxation period and as well as the strict confines of Section 28 of the TPA.

38. It was a further submission of the Appellant that the Respondent’s contention that the requisite transfer documents were executed on 4th January 2023 has no merit whatsoever as it is clear from the transfer deed that it was signed and lodged by the Appellant in December 2022, and the delay in franking the transfer deed by the relevant Government entity cannot be visited upon the Appellant.

39. The Appellant submitted and prayed that the Tribunal finds and affirms as is the law that the taxation regime of Kenya is on declaratory basis and as a result taxes are due at the point where the taxpayer makes a self-assessment, in the instant case being December 2022.

40. The Appellant also submitted that the Respondent failed to appreciate the various laws-governing the payment of CGT by the Appellant with reference to the transfer of shares.

41. It was submitted that CGT is provided for in part vi of the Income Tax Act at Section 34 (j) of the said Act as follows;“tax upon capital gains of a person charged under Section 3(2) (f) shall be charged at the rate of fifteen percent and shall not be subject to further taxation.”

42. The Appellant submitted that the law sets out a specific tax rate for the charge of CGT, and worth noting is that the rate was 5% prior to 1st January 2023 and changed to 15% following the enactment of the Finance Act 2022. Therefore, at the time of the Appellant’s self-assessment in the tax period of December 2022, relevant to this case, the tax rate was 5%.

43. The Appellant also submitted that CGT is payable on the transfer of shares as provided for under paragraph 4 (3) of the Eighth Schedule of the ITA, and posited that paragraph 6 (1) (c) of the Eighth Schedule provides the meaning of a transfer, and that a transfer occurs when;“on abandonment, surrender, cancellation or forfeiture of, or the expiration of substantially all rights to, property, including the surrender of shares or debentures on the dissolution of the company.”

44. The Appellant submitted that since the transfer of shares was affected on 30th December 2022 as evidenced by the payment certificates, it follows that the Respondent cannot on one hand purport to accept the stamp duty paid on 30th December 2022 but join issue with the CGT paid on the same date.

45. It was further submitted for the Appellant that it was an established position in law that where there is an amendment, as was the case with CGT in 2023, then the same cannot apply retrospectively. The consequence of this being that the demand for an outstanding balance of Kshs. 247,217,664. 00 is not only illegal but baseless in law as the CGT payable during the tax period of December 2022 was at the rate of 5% and guided by this the Appellant had remitted the sum of Kshs. 130,114,560. 00.

46. The Appellant also submitted that it is trite that tax laws ought to be interpreted strictly, and that there is no room for intendment in tax and cited the case of Cape Brandy Syndicate vs. I.R. Commissioners (1921) 1 KB, where it was stated:“in a taxing Act one has to look at what is clearly said. There is no room for intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”

47. It was a submission of the Appellant that the Respondent erroneously interpreted the foregoing provisions of the Eighth Schedule of ITA stating that the tax point is upon the registration of the transfer instrument in favour of the transferee/purchaser. In so doing, the Respondent failed to consider that Paragraph 11 A of the said Eighth Schedule was rendered unconstitutional in the case of LSK vs. AG (Supra), which effect is that any requirement of a due date for tax payable is inapplicable. Tax system being self–declaratory in nature, it follows that tax is due at the point in which a self-assessment is made, in the instant case the Appellant’s payment slip was made on 30th December 2022.

48. The Appellant also cited the case of Scott vs Russell (Inspector of Taxes) [1948] 2 All ER, where it was stated:“there is a maxim in Income Tax Law which, though it may sometimes be overstressed yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him.”

49. It was submitted that where any ambiguity in taxation arose, such ambiguity may be resolved in favour of the taxpayer.

50. The Appellant also submitted that the Respondent has been gravely unfair to the Appellant who by dint of the wrongful and excessive assessment is required to pay the sum of Kshs. 247,217,664. 00, and stated that according to De Smith, Woolf & Jewel’s “Judicial Review of Administrative Action” 6th Ed, sweet & Maxwell pg. 609, as cited in the Cooper brands case (supra);“A legitimate expectation is a basic principle of fairness that legitimate expectations ought not to be thwarted. The protection of legitimate expectation is at the root of the constitutional principle of the rule of law, which requires predictability and certainty in Government’s dealings with the public.”

51. In view of the foregoing, it was a submission of the Appellant that where the law is clear that the rate of CGT is 5% for the period of December 2022, the Respondent cannot purport to demand for additional taxes at the additional rate of 15 %, as this would thwart the Appellant’s legitimate expectation.

Appellant’s Prayers 52. By reason of the foregoing, the Appellant prayed the Tax Appeals Tribunal;a.Allows this Appeal;b.Annuls the impugned decision as well as the impugned assessment; and,c.Awards the costs of this Appeal to the Appellant.

The Respondent’s Case 53. The Respondent’s case is set out on its;a.Statement of Facts dated 28th September 2023 and filed on 2nd October 2023 together with the documents attached thereto;b.Preliminary Objection dated 27th February 2024 and filed on the same date; andc.Written submissions dated and filed on 27th February 2024.

54. In its preliminary objection, the Respondent raised an objection on a point of law on the grounds that the Notice of Appeal and subsequent purported Memorandum of Appeal and Statement of Fact are invalid, null and void ab initio for offending the provisions of Section 52 of the Tax Procedures Act and pursuant to Section 12 of the Tax Appeals Tribunal Act.

55. The Respondent in its Statement of Facts stated that the Appellant was among three shareholders who transferred their shares in Harley Limited to Westlands Heights Limited, a private holding company incorporated in Mauritius, which is one of the leading medical and pharmaceutical distributors in Kenya through its wholly owned subsidiary, Harleys Limited.

56. The Respondent stated that the Appellant availed the deed of shares transfer for the transaction between him and the Westlands Heights Limited which was executed on 4th January 2023 before the subsequent acquisition of Westlands Heights Limited by IBL subsidiary, Elgon Healthcare Limited. It stated that Capital Gains Tax was payable upon transfer of the shares.

57. The Respondent further stated that in February 2023, IBL limited in their investor communication informed shareholders and the public that on 13th February 2023, IBL’s subsidiary Elgon Healthcare Limited entered into a share purchase agreement for the acquisition of a majority stake in Westlands Heights Limited.

58. It was also stated by the Respondent that on 25th May 2023, the Respondent through a notice informed the Appellant of their intention to verify the CGT declarations with regard to the aforementioned transaction.

59. It also stated that on 6th June 2023, it issued a pre-assessment demand notice requiring the Appellant and his fellow shareholders to pay the balance of tax on CGT (Kshs. 247,217,664. 00) on or before 13th June 2023.

60. The Respondent stated that on 14th June 2023, the Appellant hand delivered evidence for payment of stamp duty, transfer deed, Form D certificate on transfer of certain marketable securities relating to the transfer of the shares.

61. It stated that despite receiving reminders from the Respondent, the Appellant failed to provide the following documents in relation to the transaction as per the notice:a.The duly executed share sale/purchase agreement.b.Source documents in support of the net adjusted cost of Kshs. 295,500,000. 00. c.Bank statements.d.Share transfer instrument executed in the name of the purchaser.

62. The Respondent further stated scrutiny of the availed transfer deed revealed that the total consideration from the transfer of 5,910,000 shares was 3,690,000,000 based on which stamp duty amounting to Kshs. 36,900,000. 00 was paid.

63. It also stated that the Appellant had however declared a total consideration amounting to Kshs. 2,897,791,200. 00 from the sale of 5,910,000 shares, and therefore the Appellant had underdeclared the total consideration by Kshs. 792,208,800. 00 and had also claimed an adjusted cost of Kshs. 295,500,000. 00.

64. The Respondent posited that the Appellant made a capital gain upon the registration of the transfer instrument which attracted CGT at a rate of 15% since the transaction was executed in 2023.

65. The Respondent also stated that it issued a notice of assessment dated 21st June 2023 communicating that the net capital gain made on the transfer of the shares was Kshs. 3,394,500. 00. It stated that the capital gains tax due and payable at the applicable CGT rate of 15 % amounted to Kshs. 509,175,000. 00, and the capital gains tax paid on account on 31st December 2022 under PRN amounted to Kshs. 130,114,560. 00, leaving a balance of Kshs. 416,966,484. 00 inclusive of penalty of Kshs 18,953,022. 00.

66. The Respondent stated that Section 3 of the Income Tax Act provides:“(3)Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”

67. It stated that the same section includes gains accruing in the circumstances prescribed in and computed in accordance with, the Eighth Schedule. In the Appeal herein, CGT was payable on the transaction upon transfer of shares.

68. It further stated that paragraph 11 A of the Eighth Schedule to the ITA provides that;“Due date for tax payable in respect of property transferred under this part shall be on or before the date of application for the transfer of the property is made at the relevant lands office.”

69. It further stated that the High Court had ruled on the interpretation of this section in the case of Law Society of Kenya vs.AG (Supra), that the tax point for payment of CGT is upon registration of the transfer instrument in favour of the transferee/purchaser.

70. The Respondent contended that the self-assessed CGT was instructed by Section 11 A of the Eighth Schedule of ITA which the High Court has since annulled the legality of the same in the administration of CGT more so in the instruction of the tax point. The Respondent therefore asserted that the Appellant relied on an unconstitutional provision in assessing the CGT payable.

71. The Respondent further asserted that the Appellant made a CGT gain upon the registration of the transfer instrument which attracted CGT at the rate of 15%. On the transfer deed, total consideration from the sale of 5,900,000 shares was Kshs. 3,690,000,000. 00, and therefore the net capital gain made on the transfer Kshs. 3,394,500,000.

72. It therefore contended that arising thereto, the CGT due and payable at the applicable rate of 15% was computed to a total due of a sum of Kshs. 416,966,484. 00 as follows:Description valueNet Transfer Value …………………………. 3,690,000,000. Net Adjusted cost ……………………… 295,500,000. Adjusted Capital Gain …………………… 3,394,500,000. Capital Gains Tax ………………………… 509,175,000. CGT paid on account …………………… (130,114,560).Capital Gains Tax due ……………………… 379,060,440. Penalty …………………… 18,953,022. Interest ………………………… 18,953,022. Total due ……………… 416,966,484.

73. The Respondent stated that Section 24 of the TPA allows a taxpayer to submit tax returns in the approved form and manner as prescribed by the Respondent, the Respondent is not bound by the information provided therein and can assess for additional taxes and amend an assessment based on any other available information and to the best of the Commissioner’s judgement, to the original assessment of a taxpayer as provided for under Section 31 of the TPA.

74. It further stated that Section 73 (2) (b) of the ITA also allows the Commissioner to use his best judgement to assess a taxpayer where he has reason to believe that a return filed is not true or correct. The Respondent also cited Section 29 (1) of the TPA in respect to default assessments.

75. The Respondent also stated that during the objection stage the failed to provide documents in relation to the transaction as per the notice of assessment despite several reminders, in contravention of Section 59 of the TPA which requires the Appellant to provide records to enable it determine its tax liability.

Respondent’s Prayers 76. By reason of the foregoing, the Respondent prayed that this Honourable Tribunal do find;a.The Objection Decision issued on 16th August 2023 was justified as to uphold the same; and,b.This Appeal be dismissed with costs to the Respondent as the same lack merit.

Issues for Determination 77. The Tribunal having carefully considered the pleadings, documents and submissions filed by the parties, is of the considered view that the appeal herein distils into issues which commend for determination as follows:i.Whether the Appellant’s appeal was validly filed before the Tribunal;ii.Whether the Respondent erred in determining the Appellant’s CGT tax point for the subject transaction; and,iii.Whether the Respondent erred in assessing the Appellant for additional CGT in the sum of Kshs. 416,966,484. 00.

Analysis and Determination 78. The Tribunal proceeds to analyze the said issues as hereunder;i.Whether the Appellant ‘s appeal was validly filed before the Tribunal;

79. The Respondent has raised a Preliminary Objection on a point of law to the Appellant’s Appeal, on the basis that its Notice of Appeal and the Memorandum of Appeal with the Statement of Facts, are invalid, and null and void ab initio for offending the provisions of Section 52 of the TPA, and Section 12 of the TAT Act.

80. The Respondent has submitted that the Appellant’s Notice of Appeal annexed in the Appellant’s bundle of documents was never served upon the Respondent.

81. The Respondent also submitted that Section 52 (1) of the TPA provides that;“(1)A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act.”

82. In addition, Section 12 of the TAT Act provides;“A person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax law, may subject to the provisions of the relevant tax law, upon giving notice in writing to the Commissioner, appeal to the Tribunal.Provided that such person shall before appealing, pay a non-refundable fee of twenty thousand shillings.”

83. The Respondent submitted that the word “upon giving notice in writing to the Commissioner” is a condition precedent, for filing any valid Appeal before the Tribunal, which condition precedent was never complied with, or leave to remedy the situation sought, and therefore the appeal is fatally defective in the circumstances.

84. The Notice alluded to by the Respondent is the Notice of Appeal contemplated by Section 13 (1) of the TAT Act, which provides;“(1)A notice of appeal to the Tribunal shall -a.Be in writing or through electronic means;b.Be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner”

85. Thereafter the Appellant shall, within fourteen days from the date of filing the Notice of Appeal, submit enough copies of, as may advised by the Tribunal, of a Memorandum of Appeal, Statement of Facts, and the Objection Decision. An Appellant is required to serve a copy of the Appeal on the Commissioner within two days of after giving Notice of Appeal to the Tribunal.

86. The foregoing clearly sets out the chronology of the process of commencement of an Appeal with the Tribunal.

87. It is worth noting that the Respondent did not raise the preliminary objection on the competence of the Appellant’s Appeal in its Statement of Facts and only raised the same in its submissions. This therefore did not give the Appellant an opportunity to controvert the same either in a supplementary filing or submissions thereby prejudicing the Appellant.

88. However, the Tribunal takes the view that a point of law can be taken at any stage of the proceedings, since the Notice of Appeal is the jurisdictional foundation for the Tribunal in entertaining any appeal before it, there is nothing precluding the Tribunal from entertaining the PO, or even considering the issue Suo moto.

89. In considering the Respondent’s preliminary objection, it is worth noting that it is not in contention that the Notice of Appeal was filed as contemplated under Section 13 (1) of the TAT Act, and within the statutory timelines. The Respondent’s only contention is that the notice was not served on the Respondent.

90. The Respondent issued its Objection Decision on the Appellant on 16th August 2023, and the Appellant duly filed the Notice of Appeal on 5th September 2023. The Respondent filed its Statement of Facts dated 25th September 2023 on 2nd October 2023. In this Statement of Facts, there is not even a single averment pleading lack of service of the Notice or Appeal, yet made a timely response to the Appeal.

91. The Respondent states in its submission that, “it is trite from the face of the Notice that the same was never served upon the Respondent”, and does not provide cogent evidence that service was not affected. The burden of proof was on the Respondent to prove that either there was no service of the notice as contemplated by the law, the notice was defective for lack of service, that lack of service is fundamental to the extent of disposing of the appeal or lack of service prejudiced the Respondent. Which the Respondent failed to do.

92. In view of the foregoing the Tribunal takes the view that the objection placed by the Respondent is such that it requires the Tribunal to delve deep into the facts and interrogate the evidence, hence it is not a pure fact of law, which can on the face of it conclusively determine the appeal at a preliminary stage.

93. Accordingly, the Tribunal is of the considered view that the Respondent’s Preliminary Objection is not merited and hereby fails.

94. In light of the foregoing the Tribunal holds that the Appellant’s Appeal is competently filed before the Tribunal.

ii. Whether the Respondent erred in determining the Appellant’s CGT tax point for the subject transaction; 95. The Appellant was among three shareholders who transferred their shares in Harleys Limited to a private holding company incorporated in Mauritius, known as Westlands Heights Limited.

96. Evidence has been tendered that the transfer deed for the transaction between the Appellant and Westlands Heights Limited was executed on 4th January 2023 and therefore the registration of the transfer was effected thereafter and it was hence submitted that Capital Gains Tax was hence payable upon transfer of the shares.

97. It was also submitted that on 13th February 2023, a company known as Elgon Healthcare limited, a subsidiary of IBL Group (a Mauritian conglomerate), entered into a share purchase agreement for the acquisition of a majority stake in Westlands Heights Limited (incorporated in Mauritius) which wholly owns the shares in Harleys Limited (incorporated) in Kenya, of which its share sale is the subject of this dispute.

98. It was averred that the Appellant on 14th June 2023 delivered to the Respondent delivered evidence of payment of stamp duty, Transfer deed and Form D (Certificate on Transfer of Certain marketable Securities relating to the transfer of shares).

99. It was also averred that scrutiny of the availed transfer deed revealed that the total consideration for the transfer of 5,910,000 shares was Kshs. 3,690,000,000. 00 based on which a stamp duty of Kshs. 36,900,000. 00 was paid.

100. The Respondent submitted that the Appellant made a capital gain upon the registration of the transfer instrument which attracted CGT at the rate of 15% since the transaction was executed in 2023.

101. The Respondent also submitted that the CGT self-assessed and paid by the Appellant under Payment Registration Number (PRN) on 31st December 2022 in the sum of Kshs. 130,114,560. 00 was a payment on account as the shares transfer had not been effected.

102. On the other hand, the Appellant submitted that the Appellant amongst other Board members/shareholders of Harleys Limited were in pursuant to a Board resolution transferring their shares to a holding company incorporated in Mauritius to facilitate restructuring, and it is the transfer of the shares from the Appellant to the holding company that is the subject of this Appeal.

103. The Appellant averred that in undertaking the foregoing transaction, the Appellant self-assessed the various statutory payments, and ensured that the registration documents were lodged with the respective Government agencies and thereafter remitted the payments in compliance thereto. The Appellant added that the payments included stamp duty and Capital Gains Tax which was remitted by the Appellant on 30th December 2023.

104. The Appellant further averred that on the 5th June 2023 the Respondent issued a demand for under-declared CGT in the sum of Kshs. 286,252,032. 00. And on 21st June 2023 issued a notice of assessment for the sum of Kshs. 416,966,484. 00 in CGT.

105. The Appellant further averred that the Respondent relied on the provisions of paragraph 11 A of the Eighth Schedule to the Income Tax Act, as well as the determination of the High Court in Law Society of Kenya vs. Kenya Revenue Authority & the Attorney General (supra).

106. The Appellant submitted that Kenya’s tax system is self -declaratory in nature and therefore the Respondent’s contention on what constitutes a tax point is unwarranted and contrary to the law.

107. 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. 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.

108. The thrust of the Appellant’s contention in 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.

109. In the case of Law Society of Kenya vs. Kenya Revenue Authority & AG (Supra), 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.

110. 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.”

111. Paragraph 2 of the 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.”

112. 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 9 including by way of a gift), whether or not for consideration.”

113. 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.

114. 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”.

115. 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.

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.

117. It is noteworthy that paragraph 11 A of the Eighth Schedule to the ITA which has been relied upon by the Appellant, requires that CGT 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.”

118. Consequently, and in view of the foregoing case law, 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.

119. The Tribunal therefore finds and holds that the tax point for payment of Capital Gains Tax is upon registration of the transfer instrument in favour of the transferee.

120. The Tribunal further finds and holds that the Respondent did not err in determining the Appellant’s CGT tax point as upon registration of the transfer of shares in favour of the transferee in regard to the subject transaction.

iii. Whether the Respondent erred in assessing the Appellant for additional CGT in the sum of Kshs 416,966,484. 121. The Tribunal having upheld the tax point for CGT is upon registration of the instruments of transfer in favour of the transferee, will at this point delve into the pertinent facts necessary to determine whether the Respondent’s assessment was justified.

122. It has been submitted to this Tribunal that the Transfer deed in respect of the subject transaction availed by the Appellant to the Respondent revealed that it was executed on 4th January 2023. That on 14th June 2023, the Appellant further delivered evidence for payment of stamp duty, transfer deed, and form D (certificate on transfer of certain marketable securities) relating to the transfer of shares.

123. It was further submitted by the Respondent that scrutiny of the aforesaid documents availed revealed that the total consideration amounting from the transfer of 5,910,000 shares was Kshs. 3,690,000,000. 00 based on which a stamp duty amounting to Kshs. 36,900,000. 00 was paid.

124. It was also submitted that the Appellant had declared a total consideration amounting to Kshs. 2,897,791,200. 00 from the sale of 5,910,000 shares, and had thereby underdeclared the total consideration by Kshs. 792,208,800. 00 and had also claimed an adjusted cost of Kshs. 295,500,000. 00.

125. It was also submitted that the transfer instrument was executed on 4th January 2023 and registered in 2023, and therefore the Appellant made a capital gain upon the registration of the transfer instrument which attracted CGT at the rate of 15 % applicable in 2023.

126. On the other hand, the Appellant has submitted that it self-assessed the CGT in respect of the transaction and remitted the same to the Respondent on 31st December 2022, as the tax in Kenya is payable at the point of assessment and declaration by a tax payer.

127. The Appellant also submitted 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.

128. The Appellant submitted that CGT payable during the tax period of December 2022 was at the rate of 5% and consequently the Appellant guided by this rate remitted the sum of Kshs. 130,114,560. 00 to the Respondent as CGT for the transaction.

129. It was submitted for the Appellant that the foregoing was informed by the fact that the taxation in Kenya is self-declaratory in nature and the Appellant is called upon to make self-assessment and remit the taxes to the Respondent. Therefore, it follows that the tax is due at the point in which a self-assessment is made which for purposes of this Appeal is December 2022, a fact clearly set in the Respondent payment slip dated 30th December 2022 indicating payment type as self-assessment tax and the tax period December 2022.

130. Noteworthy is that the Respondent has acknowledged the aforesaid payment as a payment on account.

131. Suffice it to add that whereas Section 24 of the TPA allows a taxpayer to self-assess and submit returns in the prescribed form and manner, the Respondent is not bound by the information provided therein and can assess for additional taxes and amend an assessment based on any other available information and to the best of the Commissioner’s judgement, to the original assessment of a taxpayer as provided for under Section 31 of the TPA.

132. Section 73 (2) (b) of the Income Tax Act also allows the Commissioner to use his best judgement to assess a taxpayer where he has reason to believe that a return filed is not true or correct.

133. Section 56 of the TPA provides that the burden of proof shall be on the Appellant to prove that a tax decision is incorrect, while Section 30 of the TAT Act provides that, in proceedings before the Tribunal, the Appellant has the burden of proving, where an appeal relates to an assessment, that the assessment is excessive, or in any other case, that the tax decision should not have been made or should have been made differently.

134. The Tribunal having considered the pertinent facts established by the documents submitted by the parties in this transaction notes that the tax point is clearly set out as upon registration of the transfer instrument which no doubt was in 2023 as the transfer instrument was executed on 4th January 2023, the rate of CGT in 2023 is 15%, and the consideration set out in the transfer instruments submitted by the Appellant is higher than that declared in its self-assessment.

135. Be that as it may, the Tribunal taking a concise review of the assessment issued by the Respondent in its Objection decision which was as follows;DESCRIPTION VALUE (Kshs)Net transfer value …………………… 3,690,000,000. 00Net Adjusted Cost …………………………... 295,500,000. 00Adjusted Capital Gain ………………………… 3,394,500,000. 00Capital Gains Tax………………………………. 509,175,000. 00Tax paid on account …………………………… (130,114,560. 00)Capital Gains Tax due …………………………. 379,060,440. 00Penalty …………………………………………. 18,953,022. 00Interest …………………………………………. 18,953,022. 00Total due ………………………………………... 416,966,484. 00

136. It is worthy noting that the Respondent has applied the parameters of assessment set out hereinabove, which have not been successfully controverted by the Appellant.

137. In light of the foregoing the Tribunal is satisfied that the Appellant has not discharged its burden of proof imposed by both the TPA and the TAT Act, to prove the Respondent’s assessment is incorrect or excessive.

138. Accordingly, the Tribunal finds and holds that the Respondent was justified and within the law in assessing the Appellant for the additional Capital Gains Tax in the sum of Kshs. 416,966,484. 00.

139. The upshot of the foregoing is that the Appellant ‘s Appeal fails.

Final Determination 140. The Appellant’s Appeal having failed, the Tribunal issues the following orders:a.The Appellant’s Appeal be and is hereby disallowed.b.The Respondent’s Objection Decision dated 16th August 2023 be and hereby upheld.c.The parties to bear their own costs.

141. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28THDAY OF JUNE 2024ROBERT M. MUTUMA - CHAIRPERSONELISHA N. NJERU - MEMBERMUTISO MAKAU - MEMBERBERNADETTE M. GITARI - MEMBERABDULLAHI DIRIYE - MEMBER