[2022] KEHC 12730 (KLR)

Kenya Revenue Authority v ABSA Bank Limited & another (Commercial Miscellaneous Application E022 of 2022) [2022] KEHC 12730 (KLR) (Commercial and Tax) (8 July 2022) (Ruling)

Neutral citation: [2022] KEHC 12730 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Commercial Miscellaneous Application E022 of 2022

A Mabeya, J

July 8, 2022

In The Matter Of: An Application By Kenya Revenue Authority For An Order Under Section 43 (3) Of Tax Procedures Act, 2015

Between

Kenya Revenue Authority

Applicant

and

ABSA Bank Limited

1st Respondent

Steven Wangai Nyuthe

2nd Respondent

Ruling

1. Before court is an application dated January 10, 2022 by the Kenya Revenue Authority (“KRA”). It was brought under section 43 (3) of the Tax Procedures Act, 2015and section 3 and 3A of the Civil Procedure Act, and order 51 rule 1 of theCivil Procedure Rules.

2. The application sought orders to preserve funds and prohibit the release, transfer, payment or other dealing involving Kshs 4,203,356/= held by the 1st respondent on behalf of the interested party pending the issuance of a tax assessment and recovery of taxes or until further orders of the court. In the alternative, the application sought orders imposing security for taxes that shall be found due and owing to the applicant.

3. The application was supported by the affidavit of Eric Riungu sworn on January 10, 2022. It was contended that the applicant had investigated the interested party and had discovered that the latter had failed to fully disclose its income for corporation tax for the period 2016-2020. That the under-declaration by the interested party had led to loss of aboutKshs 6,558,701/= in revenue.

4. For those reasons, the applicant had reasons to believe that the interested party had engaged in tax evasion which deprived the government of revenue in contravention of its constitutional and statutory duty. In view thereof, on December 29, 2021 the applicant issued the respondent with preservation of funds notices pursuant to section 43 (2) of the Tax Procedures Act 2015 (“TPA”) in the name of the interested party.

5. The applicant contended that in the circumstances, and owing to the amount of taxes involved, it was highly likely that the interested party may frustrate the recovery of the taxes if funds held by the respondent were not preserved.

6. The interested party opposed the application vide his replying affidavit sworn on January 21, 2022. His case was that the applicant served him with a notice of investigation dated October 7, 2021 and invited him and his tax representatives for a meeting. On October 22, 2021, two of his tax representatives, namely, CPA Mr Patrick Kamanja and CPA Mr Samuel Wacume, appeared before the applicant and the interested party’s tax matters were discussed.

7. It came out that the interested party was under investigation due to his perceived past dealings with KTDAbetween the years 2016-2020. That apart from the lawful dealings withKTDAas a small-scale tea farmer, the interested party only had a client-advocate relationship with KTDA. That vide a letter dated October 22, 2021, he had responded satisfactorily to a similar investigation by the Asset Recovery Agency and the letter was shared with the applicant.

8. Despite as aforesaid, the applicant issued the interested party with a tax investigation findings for the years 2016 to 2020 dated December 9, 2021 and gave him an extension of time to respond thereto. The interested party responded thereto and lodged an objection dated January 4, 2022 which was never responded to.

9. That the applicant did not challenge or respond to the objection but instead rushed to court and prematurely obtained orders that were adverse to the interested party’s smooth running of business and personal life. That the applicant’s action were malicious and oppressive.

10. That the applicant had not satisfied the mandatory conditions set out under section 43 of the TPA to justify the granting of the orders sought.

11. The applicant filed its submissions dated January 23, 2022. It was submitted that section 43(1) of the TPA could be invoked if the applicant reasonably believed that; a tax payer had made taxable supplies or had derived an income in respect of which tax had not been charged, and that the taxpayer was likely to frustrate the recovery of the tax. That if the two were satisfied, the applicant then had power to issue a preservation notice valid for 10 days until an application is made.

12. That the applicant had conducted investigations which revealed that despite that the interested party had failed to declare taxable deposits of Kshs 8,898,976/= resulting I a possible revenue loss of Kshs 4,203,356/= being Income Tax and Value Added Tax. That likelihood of the interested party frustrating the recovery of tax was the fact of gross under declarations. That the colossal amounts of revenue or taxes involved was also a consideration. That taxes amounting to Kshs 4,203,356/= had been evaded and it was necessary for public interest that the assessment of the taxes and recovery be secured.

13. The interested party filed written submissions dated January 27, 2022. It was submitted that section 43 of the TPA had not been satisfied. That there were inconsistencies on the alleged lost revenue as the Motion indicated Kshs 4,203,356/= while the supporting affidavit alleged the amount to beKshs 6,558,701/=. That there was nothing to support the allegation that the interested party’s income for the period 2016-2020 was Kshs11,236,148/=.

14. The interested party also contended both in the pleadings and submissions that he was an advocate of the High Court for 40 years and a senior partner at a reputable Law Firm. That for the last 40 years he had always met his tax obligations and obtained tax clearance certificates from the applicant. In the premises, the applicant had not demonstrated how he had or was likely to frustrate the recovery of any due tax.

15. That the applicant’s action contravened section 4(1) of the Fair Administrative Action Act which guaranteed the right to expeditious, efficient, lawful, reasonable and procedurally fair administrative action. Further, that it was against the objects of articles 10, 40, 47, 201 and 210 of the Constitution for the applicant to use the Act to arbitrarily deprive the interested party of his right to property without evidence of due taxes.

16. I have considered the application, affidavits, written and submissions by both counsel and the authorities cited therein. Section 43(1) of the Act provides: -(1)This section applies if the commissioner reasonably believes: -(a)That a tax payer-(i)Has made taxable supplies, has removed excisable goods, or has derived an income, in respect of which tax has not been charged; or(ii)Has collected a tax, including withholding tax, that has not been accounted for; and(b)That the taxpayer is likely to frustrate the recovery of the tax.”

17. From the foregoing, in order for an application under this section to succeed, the applicant must demonstrate the twin conditions set out therein have been satisfied. No doubt, every taxpayer has a duty to file tax returns and pay taxes.

18. In the present case, the interested party had filed returns and paid some money in respect of taxes. However, the applicant contends that the interested party failed to account for all the taxes due. That he under declared his income for the period 2016-2020.

19. The applicant’s contention is borne by the investigations it carried on the interested. It contends that the investigations had revealed that did its investigations and found out that the interested party had under-declared his income leading to a loss of aboutKshs 6,558,701/= in revenue.

20. The view this court takes is that, having carried some investigations in which it called the interested party to explain himself, the applicant had a basis to believe that there had been tax that had not been accounted for. Accordingly, the first condition was satisfied.

21. The second condition to be met was whether the applicant reasonably believed that the interested party was likely to frustrate the recovery of the tax. The applicant contended that owing to the interested party’s under declaration of income and evasion of tax, and owing to the amount of taxes involved, it was highly likely that the interested party may frustrate the recovery of the taxes if funds held by the respondents were not preserved.

22. The interested party denied that he was likely to frustrate the recovery of the taxes. He contended, which was not denied, that the interested party was an advocate of the High Court of 40 years standing. He is a senior partner at a reputable firm being Wangai Nyuthe & Company Advocates, and that for the last 40 year he had always met his tax obligations and obtained tax clearance certificates from the applicant. That in compliance with the applicants request for a meeting, he had sent two of his tax representatives to a meeting with the applicant, and had raised an objection to the applicant’s findings which were un-responded to to-date.

23. The court takes note that as at the time of bringing the application, no tax assessment had been made against the interested party.

24. This demonstrates two points; the first is that the conduct of the interested party was not of one who had the intention of frustrating the recovery of taxes. He had shown that he had been at all times cooperative. He not only objected to the Tax Investigation Findings but also gave detailed explanation to the nature of transactions he had undertaken with KTDA.

25. On its part, the applicant did not respond to the formal objection lodged by the interested party. Instead, the applicant proceeded to issue the preservation notices herein. It was not demonstrated that the interested party had no known assets. That the only assets he had were the frozen funds. To the contrary, the interested party showed that he had a law firm that was in operation and was not about to retire from practice.

26. Further, the inconsistencies in the applicant’s allegations as to the amount of taxes due, weighs heavily as to the veracity of the claim. It would be highly prejudicial to deprive a citizen access to his property on the basis of mere suspicion and conjecture. It must be had in mind that theTPA has elaborate provisions and procedures relating to tax assessment, objections thereto and confirmation thereof.

27. The said procedures are the primary route through which the tax authorities should collect taxes. The procedure under section 43 of the TPA is the exception rather than the rule. It is a route that should be sparingly used due to the likely disastrous consequences it might have on a tax payer.

28. In the case ofKenya Revenue Authority v Jane Wngui Wanjiru & 2 others [2018] eKLR, it was held that;“The purpose of section 43 of the TPA is to allow KRA to preserve a taxpayer’s money in the hands of a third party without notice to the taxpayer for a limited period before moving the court for formal orders of preservation. Since the exercise of the power to collect taxes, in the manner outlined by the statute, is a justifiable limitation on the right to privacy protected by article 31 of theConstitution, it must be construed strictly. This approach is buttressed by and is consistent with the principle that tax statutes must be interpreted strictly.

29. In Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 OthersNRB CA Civil Appeal No 164 of 2013 [2019] eKLR the court expressed the view that:“When it comes to interpretation of tax legislation, the statute must be looked at using slightly different lenses. With regard to tax legislation, the language imposing the tax must receive a strict construction. Judge Rowlett in his decision in Cape Brandy Syndicate v I R Commissioners [1921] 1KB (cited by the appellants), expressed the common law position in this area when he stated ‘…in a taxing Act one has to look at what is clearly said. There is no room for any 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'.

30. This court is bound to strictly construe and interpret section 43(1) of theTPA. The section requires that the applicant must demonstrate that it has a reasonable belief that the taxpayer will frustrate the collection of revenue if his funds are not preserved. There is no room for speculation. The apprehension must be demonstrated objectively. A high amount of tax suspected to be owed is not reason enough to invoke the apprehension. There must be positive evidence that the taxpayer will either refuse to pay or frustrate the recovery thereof.

31. To this court’s mind, reasonable belief means a belief that would be held by an ordinary and prudent man in the same circumstances as the actor. Reasonable belief thus means that the belief is based on reasonable grounds.

32. In this regard, the applicant ought to have demonstrated that the interested party was guilty of some ill-motived act which raised sufficient grounds to lead the applicant to reasonably believe that he would frustrated collection of tax. For instance, a taxpayer would be guilty of frustrating collection of taxes if he suddenly withdraws all his funds from his bank accounts upon realization that he is being investigated for tax.

33. The upshot is that this court finds that the applicant did not demonstrate that the interested party was likely to frustrate the recovery of tax. The second and extremely essential ground was thus not met. I agree with counsel for the interested party’s submission that by virtue of article 210, 10 and 47 of the Constitution, there should be no arbitral deprivation of property or arbitral infringement of the right to property.

34. On the alternative prayer seeking security for taxes that shall be found due and owing to the applicant, it has already been found, and it is indeed uncontested, that there is no tax assessment against the interested party. The alleged amounts due are also contradictory. It would thus be prejudicial to condemn the interested party to give security in the circumstances.

35. In the end, I find that the application has failed to meet the required threshold and the same is dismissed with costs to the interested party.

36. The preservation orders made herein are lifted forthwith.It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF JULY, 2022. A. MABEYA, FCIArbJUDGE