[2022] KEHC 91 (KLR)

Kenya Revenue Authority v Equity Bank Limited Kenya; Kaigua (Interested party) (Miscellaneous Application E020 of 2022) [2022] KEHC 91 (KLR) (Commercial and Tax) (4 February 2022) (Ruling)

Neutral citation number: [2022] KEHC 91 (KLR)

Republic of Kenya

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

Miscellaneous Application E020 of 2022

A Mabeya, J

February 4, 2022

IN THE MATTER OF: THE TAX PROCEDURES ACT NO. 29 OF 2015 -AND- IN THE MATTER OF: AN APPLICATION BY KENYA REVENUE AUTHORITY FOR AN ORDER UNDER SECTION 43(3) OF THE TAX PROCEDURES ACT, 2015

Between

Kenya Revenue Authority

Applicant

and

Equity Bank Limited Kenya

Respondent

and

Nicholas Munyi Kaigua

Interested party

Ruling

1. Before Court is a Notice of Motion dated 10/1/2022 brought by Kenya Revenue Authority (KRA) under Section 43 (3) of The Tax Procedures Act, 2015, Section 3 and 34 of The Civil Procedure Act and Order 51 Rule 1 of The Civil Procedure Rules, 2010.

2. The Motion seeks orders for the preservation of a sum of up to Kshs. 92,521,297/= in the Interested Party’s account held in the Respondent bank pending the issuance of tax assessments and recovery of taxes. In the alternative, KRA prays for security from the Interested Party for the taxes that shall ultimately be found to be due and owing.

3. The application is supported by the Affidavit of Abdul Robow, an officer of KRA. The Applicant avers that preliminary investigations into the Interested Party’s tax affairs for the period 2016 – 2021 established that he was engaged in tax evasion as he failed to fully disclose his income for the said period for purposes of corporation tax and value-added-tax. That the Interested Party’s bank account statements revealed that he had made taxable income of Kshs. 310,438,922/= during the period under investigation but under declared the Income resulting in loss of taxes in the sum of Kshs. 92,521,297/=.

4. In the premises, on 29/12/2021 KRA served the Respondent with a Preservation of Funds Notice pursuant to Section 43(2) of the Act, 2015 (“the Act”). KRA believes that owing to the foregoing and the amount of taxes involved, there is a high likelihood of the Interested Party frustrating the recovery of the taxes if the funds in the account held by the Respondent are not preserved. It is also KRA’s contention that other than the said funds, there are no other known assets belonging to the Interested Party that can satisfy the taxes that will be found due and payable after assessment.

5. In response, the Interested Party filed Grounds of Opposition dated 14/1/2022 and a Replying Affidavit. He contended that Section 43 of the Act violates due process requirements under Articles 10, 47 and 50 of the Constitution to the extent that it condemns a tax payer unheard.

6. That this Court lacks jurisdiction to grant the orders sought since the High Court can only entertain a tax dispute between a tax payer and KRA in the form of an appeal against a decision of the Tax Appeals Tribunal. Further, he contended that unless and until KRA issues a notice of assessment of the taxes due and owing from him, if any, it has no basis for applying for any orders that may adversely affect operations of his bank accounts and/or business.

7. He contends that KRA has not stated the quantum of the unremitted taxes with precision and clarity. That he has and still intends to fully cooperate with KRA in the investigation process so as to determine if at all there are any taxes due and owing by him. It is on this basis that he had met KRA officers on many occasions, attended several meetings with his auditor and tendered several documents requested by KRA.

8. Lastly, he faulted KRA for taking adverse action against him without responding to the issues he raised in his letter of response to KRA’s investigation findings.

9. The Court has carefully considered the affidavits on record, the written and oral submissions of Learned Counsel as well as the authorities cited.

10. There is a preliminary issue that I need to dispose off before delving to the application. The Interested Party contended that without a tax assessment being done, KRA has no power to act as it did. Secondly, that this Court has no jurisdiction as its jurisdiction is only to deal with appeals from the Tax Appeals Tribunal.

11. As regards tax assessment that is not a requirement before KRA can invoke its powers under section 43 of the Act. The procedure for assessment is clearly set out in sections 49 to 54 of the Act. All that is required under section 43 of the Act is the Commissioner to have a reasonable belief of the existence of unremitted tax and the likelihood of the tax payer frustrating the recovery thereof.

12. As regards jurisdiction, the submission is without basis. The jurisdiction of the High Court under section 43 of the Act is original and not appellate. I reject both objections. Now to the main matter.

13. It is the duty of every citizen to pay tax. In Pili Management Consultants Ltd vs Commissioner of Income Tax[2016], eKLR, it was held that every taxpayer has a duty to file tax returns and pay taxes as Article 210 of the Constitution provides for the duty of every citizen to pay tax. It is for that reason that there are elaborate provisions on imposition and collection of taxes. While payment of taxes is a civil duty, if its imposition and collection is not undertaken in accordance with the law, it might result in wrongful deprivation of property. It is for that reason that tax statutes are to be interpreted strictly.

14. In Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 Others NRB CA Civil Appeal No. 164 of 2013 [2019] eKLR, the Court of Appeal observed: -[…], 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'”.

15. The dispute before Court touches on Section 43(1) of the Act. It 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(iii)That the taxpayer is likely to frustrate the recovery of the tax”.

16. In Kenya Revenue Authority v Jane Wangui 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 the Constitution, it must be construed strictly. This approach is buttressed by and is consistent with the principle that tax statutes must be interpreted strictly”.

17. This provision applies where no assessment of tax has been undertaken. It is based on the Commissioner’s reasonable belief of the twin matters set out therein, viz that there is tax due which has not been remitted and that the tax payer is likely to frustrate the collection of that tax. It is only when such reasonable belief exists that the draconian procedure set out therein is to be resorted to.

18. In Crawford Adjusters (Cayman) Ltd v Sagicor General Insurance Ltd [2014] AC 366, Lord Kerr observed: -“… in demonstrating an absence of reasonable or proper cause ‘requires the proof of a negative proposition, normally among the most difficult of evidential requirements.’ The test for establishing whether there is an absence of reasonable and proper cause requires both a subjective and objective assessment. The subjective test requires an assessment as to whether the claimant honestly believed the defendant was liable in respect of the claims brought. If the Court is convinced as to the subjective state of mind, it should then consider whether, based on the information available to the claimant at the time it initiated proceedings, it was reasonable for the claimant to have reached the conclusion it did in respect of the defendant”.

19. In Hicks v Faulkner [1878] 8Q.B.D. 167, 171, Hawkins J observed: -“I should define reasonable and probable cause to be an honest belief in the guilt of the accused based upon a full conviction, founded on reasonable grounds of the existence of a state of circumstances which, assuming to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the accused to the conclusion that the person charged was probably guilty of the same imputed”.

20. Reasonable belief is the cornerstone of any action under Section 43 of the Act. To this Court’s mind, reasonable belief means a belief that would be held by an ordinary and prudent person in the same circumstances as the actor. The belief is to be based on reasonable grounds. It is not necessarily that the belief should be correct, but it must pass the test of reasonableness.

21. In this regard, therefore, KRA was under a duty to satisfy the Court that the twin conditions set out in section 43(1) of the Act had been met. These are; that the Commissioner was under a reasonable belief that there was tax due and unremitted and that the interested party was likely to frustrate the recovery thereof.

22. As regards the first condition, the appellant contended that its investigations had revealed that the banking information showed that the interested party had made taxable income of Kshs. 310,438,922/= for the tax periods 2016 to 2020, he underdeclared the income resulting in tax loss of Kshs. 92,521,297/=.

23. The findings were communicated to the interested party vide a letter dated 3/9/2021. In the applicant’s view, it is manifestly clear that the interested party derived income for which tax has not been charged and therefore the Commissioner rightfully invoked Section 43 of the Act. The applicant’s Counsel Mr. Ado has therefore urged that the monies be preserved to facilitate efficient and effective collection of taxes.

24. On the part of the interested party, Learned Counsel Mr. Gikandi submitted that no basis exists for making the orders prayed for under section 43 of the Act. Counsel holds the view that the correct procedure would have been to invoke the provisions of sections 49 to 54 of the Act relating to assessment of taxes.

25. I have considered the record. The letter that communicated the findings of the investigations set out in detail the basis of the Commissioner’s belief as to the alleged unremitted taxes. In my view, since this was not an erratic one-time act but one based on investigations that spanned 9 months, KRA cannot be said not to have had a reasonable belief that there was tax due from the interested party.

26. In this regard, I reject the interested party’s contention that without an assessment, KRA had no reasonable belief that there was tax due. I hold that, a thorough investigation that reveals that there is tax due is sufficient for the purposes of the first condition under section 43 of the Act. The first condition has been met.

27. As regards the second condition, KRA reiterated that the fact of gross under declaration of taxes coupled with the colossal amount of revenue and taxes involved, creates a reasonable belief that the interested party is likely to frustrate recovery of the tax. It is therefore contended that it is in the wider public interest that the assessment of the taxes and recovery thereof be secured.

28. Mr. Gikandi on the other hand submits that KRA has not established a basis for such belief since the interested party fully cooperated with KRA. Counsel urges that the tax payer should not be made to suffer through arbitrary freezing of his account. It is Mr. Gikandis submission that the interested party is being punished for resisting the government’s attempts to change how tea is to be dealt with.

29. The record shows that before KRA communicated its findings of 3/9/2021, there had been a lot of correspondence between the parties. There was even more correspondence after that date.

30. Notably, Mr. Ado conceded that the interested party did fully cooperate with KRA in the process of investigations. However, before any conclusion could be arrived at, that what followed was the invocation of the drastic powers donated to KRA under section 43 of the Act. KRA issued the Respondent bank with Notice of Preservation of the Interested Party’s funds on 29/12/2021.

31. Granted, the colossal amount of taxes and income involved as well as KRA’s incognizance of any known assets held by a tax payer may be a basis for reasonable belief that the tax payer is likely to frustrate the recovery of assessed taxes. However, this depends on the circumstances of each case and must be based on irresistible set of facts and/or evidence such as questionable conduct of the part of the tax payer and not on mere speculation, suspicion or extraneous consideration.

32. In this case, KRA has not intimated whether there was any adverse conduct on the part of the interested party that led the Commissioner to believe that the he would frustrate the collection of the taxes. Indeed, KRA has not alleged or provided any evidence that the interested party, for instance, had hastily started withdrawing or transferring funds from its accounts and/or disposing of its assets with a view to delay or prejudice the settlement of the matter or the pending assessment. It was not enough for KRA to act on a mere apprehension that the interested party may frustrate collection of the taxes that will ultimately be found to be due, if any.

33. The upshot is that KRA has not met the second condition under section 43 of the Act. It would have been prudent for KRA to assess the taxes due and then follow the procedure set out in sections 49 to 54 of the Act instead of invoking section 43 thereof considering its own admission of the cooperation shown by the interested party.

34. Accordingly, I find the application to be without notice and hereby dismiss the same.

35. Each party to bear own costs.

It is so ordered.DATED AND DELIVERED AT NAIROBI THIS 4TH DAY OF FEBRUARY, 2022. A. MABEYA, FCI ArbJUDGE