[2025] KETAT 219 (KLR)

Kenya Roads Board v Commissioner of Legal Services and Board Coordination (Tax Appeal E460 of 2024) [2025] KETAT 219 (KLR) (Commercial and Tax) (2 May 2025) (Judgment)

Neutral citation: [2025] KETAT 219 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E460 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

May 2, 2025

Between

Kenya Roads Board

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a state body corporate established under the Kenya Roads Board Act CAP 408 Laws of Kenya (hereinafter “KRB”) and whose primary objective is to manage the entire road network in Kenya. The Appellant is the major advisor to the Government of Kenya on all matters related to road network.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. On 20th December 2023 and on 21st December 2023, the Respondent vide the iTax issued assessment orders to the Appellant in relation to principal corporate tax totaling Ksh 4,115,810,458. 00 for the 1st July 2014 to 30th June 2022 review period. This was followed by a notice of assessment letter dated 4th January 2024, issued pursuant to Section 31 of the Tax Procedures Act, CAP 469B of the laws of Kenya (“hereinafter “TPA”) in respect 2015 to 2022 years of income.

4. The Appellant’s notice of objection letter dated 19th January 2024 objected to the entire assessment and was acknowledged by the Respondent on even date.

5. In light of the Appellant’s objection, on 18th March 2024, the Respondent rendered its objection decision reviewing downwards the principal income tax to Ksh 1,710,095,133. 00 in relation to corporate taxes for the 2015 to 2022 years of income.

6. Aggrieved by the Respondent’s objection decision dated 18th March 2024 the Appellant filed its notice of appeal dated 16th April 2024 on 17th April 2024 at the Tribunal.

The Appeal 7. The Appellant’s case was anchored upon a Memorandum of Appeal dated 30th April 2024 and filed on even date wherein the Appellant held that;i.The Respondent erred in law and in fact by issuing tax assessments out of the statutory time limit of five (5) years.ii.The Respondent failed to appreciate that under the guidance of the National Treasury, the Board on 25th October 2019 and on 13th November 2019 remitted Ksh 2,223,753,027. 00 and Ksh 608,471,728. 00 respectively to the Consolidated Fund yet this was what the Respondent was seeking to collect.iii.The Respondent failed to appreciate the provisions of Section 33 of the KRB Act which mandate the Appellant to invest funds that are not readily required for road maintenance in local banks to earn interest which is then ploughed back for the Board’s primary purpose of road maintenance and does not qualify as income generating trade activity subject to tax.iv.The Respondent ignored the fact that the Appellant has two PINs and only relied on records of one PIN in its assessment yet the Appellant is a single legal person for tax purposes and should be treated as such.v.The Respondent failed to account for all the information and explanations provided in order to appreciate all the issues placed before it, before arriving at the objection decision.vi.The Respondent violated the Appellant’s rights under Section 47 of the Constitution of Kenya, 2010 (hereinafter “the Constitution”) which provides that every person has the right to administrative action that is expeditious, efficient, lawful, reasonable, and procedurally fair.

Appellant’s Case 8. The Appellant’s Statement of Facts dated 30th April 2024 was filed on even date wherein the Appellant expounded upon the grounds of Appeal as follows;

i. The Respondent erred by issuing an assessment beyond the 5-year statutory limit. 9. According to the Appellant, the Respondent acted ultra vires and contrary to Section 31 of the TPA when it assessed for the 2015 to 2018 period yet in the letter of 29th March 2021 the Respondent did not make any allegation or evidence to demonstrate gross or willful neglect, evasion or fraud which is the exception rule under Section 31. The Appellant in buttressing its position cited the case of National Social Security Fund Board of Trustees v Commissioner of Domestic Taxes, Kenya Revenue Authority [2016]eKLR where the Court held as follows:“…if there is no evidence to support the allegations or assertions of willful neglect, then there is no basis upon which the period for the assessment of tax could have been extended.”

10. The Appellant held that the Respondent violated its constitutional rights as enshrined under Article 47 of the Constitution by seeking to assess beyond the statutory five year period without legal basis and relied on the case of Ecobank Kenya Limited v The Commissioner of Domestic Taxes[2012[eKLR and Agricultural Training Board v Aylesbury Mushrooms Ltd[1972] All ER 280 where it was held that; “where Parliament has laid a procedure which should be followed before a body can exercise its powers, the body will be acting ultra vires if it does not follow the procedure.” As regards procedural fairness, the Appellant relied on the following holding in the High Court case of Export Trading Company v Kenya Revenue Authority [2018]eKLR :“This court notes that the importance of taxation and the collection of taxes for any government cannot be gainsaid. It must however be noted that the processes and procedures leading to the collection of the said taxes must meet the relevant legal and constitutional thresholds in order to ensure the citizen’s rights have not been violated and/or are threatened with violation.”

(ii) The Respondent did not take into account that the interest income earned from the various banks is ploughed back for the Board’s primary purpose of road maintenance under the KRB Act. 11. The Appellant stated that its main income is proceeds from Road Maintenance Levy Fund comprising road maintenance levy (fuel levy) and transit tolls imposed under the Public Roads Toll Act CAP 407 of the Laws of Kenya (hereinafter “PRTA”) and do not qualify as income for tax purposes as this is levy charged to petroleum products and not income resulting from trade activities.

12. The Appellant further stated that it invests surplus funds in different commercial banks or Government securities as provided by Section 33 of the KRB Act thereby earning interest income that is subject to 15% withholding tax as provided for by Section 35 and Third Schedule to the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”). That interest income earned thereto is distributed towards maintenance, rehabilitation and development of road network in accordance to Section 31(3) of the KRB Act and Section 4(a) of the Road Maintenance Levy Fund Act, CAP 427 of the Laws of Kenya (hereinafter “RMLFA”)

13. The Appellant asserted that interest income earned was not chargeable to tax and that the Respondent failed to appreciate that had the Appellant factored expenses incurred against the income, it would have resulted in a tax receivable position.

(iii) The Respondent failed to appreciate that in 2019 year of income, the Board under the direction of the National Treasury, remitted an amount of Ksh 2,832,224,755. 00 to the Consolidated Fund and was seeking to collect funds already remitted. 14. The Appellant stated that a letter dated 16th September 2019 from the National Treasury and Planning advised the Appellant to defer the purchase of office premise and instead remit accumulated funds to the Consolidated Funds. The Appellant remitted a total of Ksh 2,223,753,027. 00 on 25th October 2019 and Ksh 608,471,728. 00 on 13th November 2019. On 28th November 2019, the Respondent in a letter acknowledged the remittances of Ksh 2,223,753,027. 00 and requested for copies of Appellant’s financial statements for years the remittances related to wherein the Appellant supplied the same on 23rd January 2020.

15. The Respondent communicated its financial statements review findings on 22nd October 2020 indicating that the Appellant failed to declare earning interest income and similarly failed to file its corporate tax returns for 2015 to 2020 years of income as a result the Respondent demanded principal taxes of Ksh 1,717,455,745. 00. In response, the Appellant on 26th October 2020 emphasized that its interest income neither qualified for charge to tax nor were they generated from trade activity subject to tax. Furthermore, that all the surplus earned from interest for the period had been remitted to the National Treasury and the Appellant had no funds to settle the tax demand.

16. However, on 15th December 2020, the Respondent issued a demand letter and agency notice for Ksh 1,717,455,745. 00 but lifted the same on 17th December 2020 stating that the matter had been resolved amicably. That despite this position, the Respondent reverted back 36 months later with similar amounts in total disregard of the previous correspondences for a matter that had been resolved and marked as closed yet the Appellant had been compliant with its income tax obligations since 2021 following the Respondent’s advisory.

(iv) The Respondent ignored the fact that the Board has two Personal Identification Numbers (PINs) and only relied on records in one PIN (Kenya Roads Board-P051134580X) in its assessment. 17. According to the Appellant, whereas Section 31(5) of the KRB Act allows it to spend 3% of total collections in a given financial year toward recurrent expenditure subject to approval by the Cabinet Secretary, it allocates 2% for operations while 98% of the total collections are distributed to various road agencies for maintenance, rehabilitation and development of road network in Kenya. As a result, the Appellant prepares two sets of financial statements to account for the funds collected in line with provisions of the Public Finance Management Act, CAP 412A of the Laws of Kenya (hereinafter “PFMA”) to enhance transparency and accountability for its day-to-day operations and road maintenance.

18. The Appellant asserted that despite the Respondent issuing it with two PINs, it is a single legal body that should have one PIN as provided for under Section 12 of the TPA and that the Respondent was in err when it approved the Appellant’s second PIN and further proceeding to deny the Appellant from utilizing tax credits in the second PIN. That this was a violation of the Appellant’s rights under Article 47 of the Constitution which provides that every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.

Appellant’s Prayer 19. The Appellant’s sought the following reliefs from the Tribunal:a.The Appeal be allowed with costs to the Appellant.b.The Respondent’s decision dated 18th March 2024 be vacated.

Respondent’s Case 20. The Respondent replied to the Appeal through its Statement of Facts dated and filed on 24th May 2024 wherein the Respondent identified two issues for determination as follows:i.Whether the Respondent erred in law by issuing the additional assessments of Ksh 1,710,095,133. 00?ii.Whether the Respondent’s objection decision was proper in law?

21. According to the Respondent, in an engagement on 17th February 2022, the Appellant was informed on the need to amend income tax returns for 2015 to 2020 to capture interest income correctly as taxable income. That however, the Appellant filed the returns for 2015 to 2022 years of income on 22nd March 2022 declaring interest income as exempt.

22. The Respondent stated that the Appellant held two separate PINs and two consolidated sets of financial statements indicated a tax refund position. Further, that the Appellant had not filed income tax returns for both PINs for the year 2021 and 2022 that would have enabled the Appellant to utilize any tax refunds to offset the taxes and allow one of the PINs to be stopped as instructed by the Respondent in their letter of 19th July 2023. However, the Appellant filed income tax returns for 2021 and 2022 on 24th July 2023.

23. The Respondent stated that the Appellant on 7th September 2023 requested for refund on the consolidated group view which was to be used to offset the principal tax that however, there was no application made on the Respondent’s i-Tax platform.

24. It was the Respondent’s case that a review of financial statements and i-Tax returns had established discrepancies regarding interest income declaration for years of income spanning from year 2015 to 2022 where the Appellant had declared the interest income as exempt whereas it was a taxable income as provided under Section 3(2)(b) of the ITA. That Respondent amended the returns pursuant to Section 31(4) of the TPA as the Appellant had filed income tax but had grossly under declared interest income. The Respondent relied on Section 24 of the TPA which provides as follows:“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess as taxpayer’s tax liability using any information available to the Commissioner.”

25. The Respondent held that in establishing the correct taxable interest income, a comparison of self-declared amount was made with the following:a.Interest income as per audited annual financial statements.b.All withholding certificates declared as per Jaspersoft was compared with equivalent income generated.c.Withholding tax interest deducted and remitted by the bank.

26. The Respondent averred that it assessed the Appellant’s operations account whose PIN was registered in year 2009 and that when the Appellant applied for a merger of this PIN with the other Fund PIN that had been issued in year 2020, the Respondent advised the Appellant to comply with Section 12(2) of the TPA which provides that;“A registered person shall use a PIN for the purpose of all tax laws and a registered person shall be issued with only one PIN at any time.”

27. The Respondent further held that the Appellant failed to comply with Section 10 and 14 of the TPA despite the advice to do the following:i.Pay all outstanding taxes;ii.File Appellant’s Fund’s returns and ensuring they were up to date;iii.Initiation of the cancellation of tax obligations for the Appellant’s Fund account on i-Tax;iv.Confirmation of closure of bank accounts operated in the name of Kenya Roads Board Fund;v.Sworn affidavits for the company representatives; andvi.Amendment of the Appellant’s income tax returns to accurately reflect the interest income.

28. The Respondent asserted that it was not in err by assessing one set of accounts registered in one PIN as there was a clear separation of funds and interest income related to the operation account and the Appellant is not exempted from income tax pursuant to 1st Schedule to the ITA. The Respondent further held that the Appellant’s remittances to the National Treasury were not in compliance with Section 211(4) as read with Section 219(2) and (3) of the PFMA provides as follows:“211(4).Regulatory agencies shall be categorized as Schedule 3 national and government entities.219(2).A regulatory authority established by an Act of Parliament and referred to under regulation 211(4), shall remit into Consolidated Fund, ninety per centum of its surplus funds reported in the audited financial statements after the end of each financial year.219(3).A regulatory authority to which this section applies shall be exempt from the income tax.”

29. The Respondent asserted that its assessments were in accordance with the law and properly issued.

30. It was the Respondent’s case that the Appellant failed to provide sufficient evidence to support its objection as couched under Section 56(1) of the TPA as read with Section 30 of Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) and that the Appellant was informed the basis of the assessment and how the decision was arrived at as outlined in the objection decision. Therefore, the averments by the Appellant in its Memorandum of Appeal and Statement of Facts were unfounded in law and not supported by evidence thus the Respondent’s objection decision was proper and the same should be upheld.

Respondent’s Prayers 31. The Respondent made the following prayers:i.That the Tribunal dismiss the appeal with costs as the same was without merit.ii.That the Tribunal upholds the Respondent’s decision dated 18th March 2024 demanding principal taxes of Ksh 1,710,095,133. 00 together with interest and penalties.

Parties’ Written Submissions 32. The Appellant’s written submissions were dated and filed on 8th November 2024 wherein the Appellant submitted and expounded verbatim on the four issues as raised in the Statement of Facts which the Tribunal considered and will not rehash.

33. The Respondent’s written submissions were dated and filed on 6th November 2024 wherein the Respondent raised exact issues for determination as held in its Statement of Facts. The Tribunal having considered the same will not rehash them.

Issues for Determination 34. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions adduced before it notes that three issues distil for its determination as follows:i.Whether the Respondent erred in assessing beyond the five-year statutory timeline.ii.Whether Appellant’s interest income was subject to tax.iii.Whether the Respondent’s objection decision dated 18th March 2024 was justified.

Analysis and Findings 35. The Tribunal having established that three issues for call for its determination will proceed to analyze them as follows:

i. Whether the Respondent erred in assessing beyond the five-year statutory timeline. 36. The dispute at hand arose when the Respondent brought to charge the difference between income earned and reported in the audited financial statements with that filed in the i-Tax returns for the 2015 to 2020 review period. The Respondent went on to issue an assessment on 4th January, 2024

37. The Tribunal notes the Appellant’s apprehension was that its tax assessments covered a period outside the five-year statutory limit without the Respondent having demonstrated its gross or willful neglect, evasion or fraud which is the only exception to this rule under Section 31 of the TPA. On its part, the Respondent held that it sought to assess income beyond the five years statutory limit upon realizing that the Appellant had earned and reported interest income but declared the same as exempt from tax. The Tribunal notes that Section 31(1) and (4) of the TPA provides as follows:“(1)Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment”) by making alterations or additions, from the available information and to the best of the Commissioner’s judgement, to the original assessment of a taxpayer for a reporting period...(4)The Commissioner may amend an assessment—a.in the case of gross or willful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time…”

38. The Tribunal notes for the Respondent to succeed in assessing the Appellant beyond the five-year statutory limit, the law requires the Respondent to prove gross or willful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time. The Tribunal notes that even though the Appellant bears the burden in all tax matters, the Respondent in the instant Appeal failed to adduce before the Tribunal any evidentiary evidence why it sought to assess the Appellant beyond the time period provided for in law. This being the case, the Tribunal’s view is that the Respondent erred in assessing the Appellant beyond the five-year statutory timeline.

ii. Whether Appellant’s interest income was subject to tax. 39. The Tribunal observes that it was not disputed that the Appellant earned interest income it even reported in its audited financial statements; what is on trial is whether the interest income earned was subject to tax.

40. The Tribunal notes that whereas tax is chargeable on income as defined under Section 3(2) of the ITA, KRB receives income from the Exchequer, grants, gifts, donations or endowments pursuant to Section 8 of the KRB Act thus, does not fit the definition of income as couched under Section 3(2) of the ITA. Additionally, the Tribunal notes that withholding tax on interest is a final tax as provided for under Section 35 of the ITA.

41. Accordingly, the Tribunal having established that the Appellant’s income is not subject to tax finds that the Appellant’s interest income was exempt from tax.

(iii) Whether the Respondent erred in its issuance of a PIN to Kenya Roads Board Fund. 42. The Tribunal observes from the pleadings placed before it an emerging illegal act which was consented to by both parties with regard to the issuance of more than one Personal Identification Number (hereinafter “PIN”). The Tribunal also observes the illegality of issuance of a PIN to an entity that is not a person.

43. The Tribunal notes that pursuant to Section 2 of the KRB Act, “Board” means ‘the Kenya Roads Board established by section 4’ whilst “Fund” means ‘the Kenya Roads Board Fund established by section 31. ’ The Tribunal further notes that Section 4 of the KRB Act establishes the Board as a body corporate with perpetual succession and common seal…” known as the KRB. Pursuant to Section 31 of the KRB Act the established Fund is vested in the KRB and it is not a legal person.

44. The Tribunal’s view that the Fund is not a legal person is of importance pursuant to the following provisions of Section 3 of the TPA as read in tandem with Section 8 and 12(2) of the TPA:“(3)a person includes an individual, company, partnership, limited partnership, association of persons, trust, National Government, foreign government, political subdivision of the National Government or foreign government, or an international organization;”“(8).A person whoa.Has accrued a tax liability or who expects to accrue a tax liability under the Income Tax Act or the Value Added Tax Act, 2013;b.Expects to manufacture or import excisable goods; orc.Expects to supply excisable services Shall apply to the Commissioner to be registered.”“12(2).A registered person shall use a PIN for the purposes of all tax laws and a registered person shall be issued with only one PIN at any time.”

45. The Tribunal notes the following provisions of Section 2(1) of the TPA outlining the objects and purpose of the TPA:“The object and purpose of this Act is to provide uniform procedures for—(a)consistency and efficiency in the administration of tax laws;(b)facilitation of tax compliance by taxpayers; and(c)effective and efficient collection of tax.”

46. The finding of the Tribunal in this regard is that issuance of the Appellant by the Respondent of two PINs was illegal, first on the basis that a taxpayer can only have one PIN at one particular time and second the fund is not a body corporate capable of being issued with a PIN.

47. Consequently, the Tribunal finds that the Respondent erred in its issuance of a PIN to Kenya Roads Board Fund.

Final Decision 48. The Order that recommends itself in this matter is as follows:a.The Parties to ensure cancellation of the PIN issued for the KRBF within 90 days of delivery of this Judgment pursuant to Section 10 and 14 of the TPA, consequent upon which the assessment will be deemed null and void.b.Each party to bear its own costs.

49. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 2ND DAY OF MAY, 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER