[2025] KETAT 141 (KLR)

Nabo Africa Funds v Commissioner of Domestic Taxes (Tax Appeal E334 of 2024) [2025] KETAT 141 (KLR) (21 February 2025) (Judgment)

Neutral citation: [2025] KETAT 141 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E334 of 2024

RM Mutuma, Chair, M Makau, Jephthah Njagi, D.K Ngala & T Vikiru, Members

February 21, 2025

Between

Nabo Africa Funds

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is an umbrella investment scheme registered as a Collective Investment Scheme (CIS) under Section 30 of the Capital Markets Act, and part ii of the Capital Markets (Collective Investment Schemes) Regulations, 2001, and is engaged in the business of investing funds in transferrable securities and other permitted assets of any kind.

2. The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act and mandated with the responsibility for the assessment, collection, receipting and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of all statutes set out under the schedule to the said Act.

3. The Appellant lodged an Income Tax refund claim with the Respondent on 23rd June 2021 in relation to the year financial 2019 – 2020 amounting to Kshs. 16,549,291. 00 in accordance with section 47 A of the Tax Procedures Act relating to Income Tax erroneously deducted at source.

4. The Respondent reviewed the refund claim lodged by the Appellant and on 6th March 2024 approved the claim in its entirety, amounting to Kshs. 16,549,291. 00.

5. The Respondent instead of disbursing the said approved amount in cash, issued a refund adjustment voucher which permits the Appellant to set off the approved amount of Kshs. 16,549,291. 00 against pending and future tax liabilities.

6. The Appellant aggrieved by the Respondent’s said Refund Decision lodged its Appeal vide the Notice of Appeal dated 12th March 2024 on 13th March 2024.

The Appeal 7. The Appellant filed its Memorandum of Appeal dated and filed 4th April 2024 and set out the following grounds of appeal;a.That the Respondent erred in law and fact by allocating the Income Tax refund claim lodged by the Appellant as an advance credit, instead of disbursing the same in cash;b.That the Appellant, being exempt from Income Tax, does not have any avenue for recovery of the allocated advance credit, rendering the same of no use;c.That the Respondent’s failure to disburse the refund claim violates the Appellant’s Constitutional right to fair administrative action; and,d.That it is in the interest of justice to grant the reliefs sought herein.

The Appellant’s Case 8. The Appellant’s case is premised on its;a.Statement of Facts filed on 4th April 2024; and,b.Written submissions filed on 13th March 2024.

9. The Appellant stated that it is licensed as a Collective Investment Scheme (CIS) by the Capital Markets Authority as a collective investment scheme, and is registered by the Commissioner under Section 20 of the Income Tax Act as a Unit Trust and subsequently exempt from income tax.

10. The Appellant stated that on 23rd June 2021, it lodged an Income Tax refund claim with the Respondent in relation to the financial year 2019 and year 2020 amounting to Kshs. 16,549,291. 00, in line with Section 47 A of the TPA, on account of Income Tax erroneously deducted at source, which would not have been deducted otherwise, given the Appellant’s Income Tax exempt status.

11. It was stated that the Respondent reviewed the refund claim lodged by the Appellant and on 6th March 2024 approved the claim in its entirety, amounting to Kshs. 16,549,291. 00.

12. It was further stated that instead of disbursing the approved amount in cash, the Respondent issued a refund adjustment voucher on 6th March 2024, which permits the Appellant to set off the approved amounts of Kshs. 16,549,291. 00 against future tax liabilities.

13. The Appellant aggrieved by the Respondent’s Refund Decision preferred the appeal herein.

14. The Appellant stated that it relied on Section 47 A of the TPA which provides;“(1)Where a tax has been paid in error, the commissioner shall, except as otherwise provided in this Act or the relevant tax law, refund such tax.(2)In processing a refund under subsection (1), the provisions of section 47 (1) (2) (3) (4) and (5) shall apply with the necessary modifications.(3)For the purposes of this section, “tax paid in error” means any tax paid which the commissioner is satisfied ought not to have been paid.”

15. It was stated that in processing a refund application under Section 47, the necessary modifications provided under Section 47 (2), (3), (4) and (5) of the TPA are applicable.

16. The Appellant further stated that Section 47 (2) (b) provides that;“The commissioner shall ascertain and determine an application under subsection (1) within ninety days and where the commissioner ascertains that there was overpayment of tax …(b)in the case of an application under subsection (1) (b), refund the overpaid tax within a period of six months from the date of ascertainment and, if the commissioner fails to refund, the overpaid tax shall be applied to offset the taxpayer’s outstanding tax debt or future tax liabilities.”

17. It was stated that based on the interpretation of Section 47 (2) (b), the following conditions must be met, for the Commissioner to apply a refund claim as an advance credit;i.The Taxpayer should have outstanding tax liabilities; or,ii.The Taxpayer should have future tax liabilities.

18. The Appellant stated that based on the foregoing interpretation, it has not met the conditions for the advance credit;i.The Appellant does not have any outstanding tax liabilities that can be offset against the advance credit;ii.The Appellant is exempt from Income Tax under Section 20 (1) of the ITA, and therefore there are no foreseeable future tax liabilities.It stated that it does not have any other registered tax obligation.

19. It was stated that the provisions of Section 47 (2) (b) and (5) of the TPA outlines the order in which the Commissioner may apply the refund as hereunder;“(5)Where the application is for a refund of tax under subsection (1) (b), the commissioner shall apply the overpayments in the following order:a.In payment of any other tax owing by the taxpayer under the specific tax law;b.In payment of a tax owing by the taxpayer under any other tax law; and,c.Any remainder shall be refunded to the taxpayer.”

20. It was stated that based on the provisions of Section 47 (5) of the TPA, and the failure of the Appellant to meet the first two conditions highlighted above, the Commissioner is obligated to refund the claim in cash to the Appellant.

21. The Appellant stated that as a registered unit trust under Section 20 (1) of the ITA it is exempt from income tax under Section 20 (1), which provides;“(1)Subject to conditions specified by the cabinet Secretary under section 130-a.A unit trust registered by the commissioner, shall be exempt from income tax…”

22. The Appellant stated that based on the foregoing, it is evident that the Appellant, being exempt from income tax and having no other tax obligations, will not be able to utilize or recover this advance credit rendering it effectively useless.

23. The Appellant also stated that the Respondent’s failure to disburse the refund claim is inconsistent with the provisions of Article 47 of the Constitution of Kenya, which provides that;“every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.”

24. It was further averred that Section 47 (1) and (2) of the Fair Administrative Actions Act provides;“(1)Every person has the right to administrative action which is expeditious, efficient, lawful, reasonable and procedurally fair.(2)Every person has the right to be given written reasons for any administrative action that is taken against him.”

25. The Appellant also stated that Section 2 of the Fair Administrative Actions Act describes “administrative action” to include;“the powers and functions and duties exercised by authorities or quasi-judicial tribunals; or any act, omission or decision of any person, body or authority that affects the legal or interests of any person to whom such action relates.”

26. It was stated that by disregarding the provisions of Section 47 (5) of the TPA, the Respondent is in breach of the Constitutional tenets on fair administrative action as provided under Article 47 of the Constitution.

27. In its submissions, the Appellant submitted that its primary contention is that the Respondent erred both in law and fact by electing to allocate the income tax refund due to the Appellant as an advance credit, which may be set off against any existing or future tax liabilities, rather than disbursing the refund through a direct cash payout contrary to the provisions of Section 47 A of the TPA.

28. The Appellant also submitted that pursuant to the provisions of Section 47 A of the TPA, in processing a refund thereto, the Respondent is subject to considering modifications provided for under Section 47 (1), (2), (3), (4) and (5) of the TPA, pertinent being Section 47 (2) (b) and (5) of the TPA.

29. It was submitted that from the afore cited provisions, the following conditions must be met for the Respondent to apply a refund claim as advance credit;i.The taxpayer should have outstanding tax liabilities; orii.The taxpayer should have future tax liabilities.

30. It was further submitted that the Appellant being a registered Unit Trust under Section 20 (1) of the ITA, it is exempt from Income Tax by dint of the provisions of Section 20 (1) of ITA, and therefore does not have any other registered tax obligation. It therefore follows that in the absence of any outstanding or future tax liabilities, any reminder of the overpayment after the application to outstanding tax liabilities, which in this case is the full amount, ought to be refunded to the taxpayer.

31. It was submitted that given that the Appellant is exempt from income tax and holds no other tax obligations, the advance credit remains unutilized and effectively non-recoverable. Accordingly, the Respondent erred in law by failing to disburse the refund claim in cash.

32. The Appellant also submitted that the failure to disburse the refund claim in cash violates the Appellant’s constitutional right to fair administrative action. It submitted that given that the Appellant has no future tax liabilities, the Respondent’s decision to issue a non-recoverable tax credit, rather than refunding the overpaid tax in cash, is not only legally erroneous but procedurally unfair, which course of action impedes the Appellant’s Constitutional right to an administrative decision that is reasonable, expeditious, efficient, and lawful.

The Appellant’s Prayers 33. By reason of the foregoing, the Appellant prayed for orders;a.That the Refund Decision issued by the Respondent be set aside and annulled;b.That the Respondent be ordered to disburse the Income Tax Refund claim lodged by the Appellant, amounting to Kshs. 16,549,291. 00 in cash;c.That the Tribunal be at liberty to make any such orders as it deems necessary in the circumstances; and,d.That the costs of the application be provided for.

The Respondent’s Case 34. The Respondent’s case is premised on the following;a.The Statement of Facts dated and filed on 3rd May 2024; and,b.Written submissions dated and filed on 20th August 2024.

35. The Respondent stated that the Appellant lodged an Income Tax refund claim on 23rd June 2021 for the period 2019 (Kshs. 5,572,733. 00) and 2020 (Kshs. 10,976,558) all totaling Kshs. 16,549,291. 00.

36. The Respondent processed the Appellant’s refund claim for the amount of Kshs. 16,549,291. 00 and approved the same for payment on 21st February 2022.

37. It was stated that on 6th March 2024, the Appellant was issued with a Refund Adjustment Voucher which facilitates the Appellant’s set off for the approved amount against pending and future tax liabilities, thus triggering the dispute herein.

38. The Respondent stated that the Appellant lodged a refund claim under Section 47 (1) (b) which states that;“(1)Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the commissioner, in the prescribed form – (b) for a refund of the overpaid tax within five years, or six months in the case of value added tax, after the date on which the tax was overpaid.”The claim was processed and the total amount of Kshs. 16,549,291. 00 approved for payment on 21st February 2022.

39. It was also stated that the funding allocation for payment of income tax refunds is Kshs. 150 Million per quarter, which is not sufficient to pay all approved refund claims and payments are made on first in first out (FIFO) basis, with a capping of Kshs. 3 million. It was owing to this that the Respondent could not refund the Appellant ascertained amount within six months hence was issued with a Refund Adjustment Voucher in line with the provisions of the Finance Act 2023.

40. The Respondent further stated that a refund adjustment voucher is a system functionality for implementation of the provisions of the Finance Act, 2023.

41. It averred that in July 2023, Section 60 (b) (ii) of the Finance Act, 2023 amended Section 47 (2) (b) of the Tax Procedures Act, 2015;“(ii)by deleting the words ‘two years from the date of application’ appearing in paragraph (b) and substituting therefore the words ‘six months from the date of ascertainment and, if the commissioner fails to refund, the overpaid tax shall be applied to offset the taxpayers’ outstanding tax debt or future tax liabilities.”

42. It was therefore submitted that the law requires approved claims not paid within six months be utilized against existing debt or future tax liabilities without exception.

43. In its submissions, the Respondent stated that the Appellant’s main issue is that since it does not have past or future tax liabilities, because if its tax-exempt status as a registered unit trust, its overpaid tax refund claim ought to be made via a cash refund.

44. It also submitted that it issued the Appellant with the tax exemption, and refund voucher for its overpaid taxes, and it is the Appellant who is insistent on getting a cash refund from the Respondent despite already having a refund voucher.

45. It was submitted that Section 47(2) (b) of the TPA as amended by section 60 (b) (ii) of the Finance Act 2023, states that where the Respondent fails to refund, the overpaid tax should be applied to offset Appellant outstanding tax debt or future tax liabilities.

46. The Respondent cited the case of Commissioner of Domestic Taxes vs. CKL Africa Limited 2023 eKLR, which cited Republic vs. Commissioner of Domestic Taxes Large Taxpayers Office Ex-parte Barclays Bank of Kenya Ltd [2012] eKLR, where the court held;“The approach to this case is that stated in the often-cited case of Cape Brandy Syndicate vs. Inland Revenue Commissioners 91920) 1 KB64 as applied in T.M Bell vs. Commissioner of Income Tax (1960) EALR 224 where Roland J. stated “…in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing to be implied. One can only look fairly at the language used …”

47. The Respondent also cited the case of Kenya Revenue Authority vs. Republic (Ex-parte Fintel Ltd) NRB CA No. 311 of 2013 [2019] eKLR, which cited with approval the dictum of Lord Atkinson in Inland Revenue Commissioners vs. Duke of Westminster (1936) AC1, where it was stated;“It is well established that one is bound , in construing revenue Acts, to give a fair and reasonable construction to their language without leaning to one side or the other, that no tax can be imposed on a subject by Acts of Parliament without words in it clearly showing an intention to lay the burden upon him, that the words of a statute must be adhered to, and that so called equitable constructions of them are not permissible .”

48. The Respondent submitted that its case is based on the express provisions set out in Section 47 (2) (b) of the TPA as amended by Section 60 (b) (ii) of the Finance Act, 2023, whereas the Appellant’s case is based on intendment reading of the said provisions.It was submitted that the law clearly allows the Respondent to offset the Appellant’s overpaid taxes with past or future tax liabilities. The Appellant’s preference for a cash refund ought not to override the express provisions of the law.

49. It was submitted that the Refund Voucher to be used in the offset rather than cash refund is not a breach of the Appellant’s right to fair administrative action, but rather the Respondent applying the express provisions of the law in issuance of refunds.

50. It was also submitted that it was not justifiable for the Appellant to state that the inability of the Respondent to issue cash refunds due to budgetary constraints to be an unfair administrative action, yet the said action is legal, prudent use of limited financial resources and beneficial to the Appellant.

The Respondent’s Prayers 51. By reason of the foregoing, the Respondent prayed for orders;a.The Respondent’s decision is proper in law and the same be affirmed.

Issues for Determination 52. The Tribunal having carefully considered the pleadings and submissions filed by the parties is of the considered view that two issues crystalize for determination as follows;i.Whether the Appellant’s appeal is validly before the Tribunal; and.ii.Whether the Respondent erred in law and was thus unjustified in allocating Appellant ‘s approved Income Tax refund for use in offsetting its future tax liabilities as opposed to a cash refund as sought.

Analysis and Determination 53. The Tribunal having determined the issues for determination will proceed to analyze and determine the same as hereunder;i.Whether the Appellant’s Appeal was validly before the Tribunal;

54. The Appellant herein is a capital markets licensed investment scheme which invests in unit trusts and which is also exempted from income tax by the Commissioner in accordance with the Income Tax Act.

55. The brief background to the dispute herein is that the Appellant lodged an income tax refund claim on 23rd June 2021 with the Respondent in relation to income tax erroneously deducted at source, otherwise not deductible, for the financial year 2019 and 2020 in the total sum of Kshs. 16,549,291. 00.

56. The Respondent approved the refund of the claim in entirety on 6th March 2024 amounting to Kshs. 16,549,291. 00. At the same time the Respondent issued a refund adjustment voucher, permitting the Appellant to set off the approved amount of Kshs. 16,549,291. 00 against pending and future tax liabilities pursuant to Section 47 (2) (b) of the TPA.

57. The Appellant’s contention is that since it does not have past or future tax liabilities, because of its tax-exempt status as a registered unit trust, the Respondent ought to disburse its tax refund in a lumpsum payment.

58. On the other hand, the Respondent has pleaded and submitted that the funding allocation for payment of income tax refund is Kshs. 150 M per quarter, which is not sufficient to pay all the approved refund claims and payments are made on first- in – first - out basis, subject to a capping of Kshs. 3 M. It was on this account that the Respondent could not refund the ascertained amount on cash basis within six months, hence issued the Appellant with a Refund Adjustment Voucher in line with the provisions of the Finance Act 2023, stating that the law requires that approved claims not paid within 6 months be utilized against existing or future tax liabilities without exception.

59. In view of the foregoing the parties find themselves in a legal quagmire granted that the Respondent’s financial policy position, and the legal provisions relied upon, threaten taxpayers who have no means to offset overpaid taxes through either existing or prospective future tax liabilities, such as the Appellant, with deprivation of their funds and which can leave them in a position of irretrievable financial loss.

60. The Primary issue in dispute therefore arises from the Appellant’s contention that, the Respondent erred in law and fact, and was unjustified in electing to allocate the Appellant’s approved income tax refund as an advance credit to be set-off against any existing or future tax liabilities, which the Appellant had none in view of its tax-exempt status, rather than disbursing the approved refund through a direct cash payment.

61. The Subject refund claim was made pursuant to Section 47 A, which provides;“(1)Where a tax has been paid in error, the commissioner shall, except as otherwise provided in this Act or the relevant tax law, refund such tax.(2)In processing a refund under subsection (1), the provisions of Section 47(1), (2), (3), (4) and (5) shall apply with the necessary modifications.(3)For the purposes of this section, “tax paid in error “means any tax paid which the commissioner is satisfied ought not to have been paid.”However, the Provisions of Sections 47 (1), (2) and (5) of the Tax Procedures Act are to apply to the Application with appropriate modifications. The said provisions state;“(1)Where a taxpayer has overpaid a tax under any law, the taxpayer may apply to the Commissioner, in the prescribed form –a.To offset the overpaid tax against the taxpayer’s future tax liabilities; orb.For a refund of the overpaid tax within five years, or six months in the case of value added tax, after the date on which the tax was overpaid.”

62. Section 47 (2) provides as follows;“(2)The commissioner shall ascertain and determine an application under subsection (1) within ninety days and where the commissioner ascertains that there was an overpayment of tax –a.In the case of an application under subsection (1) (a), apply the overpaid tax to such future tax liability; and,b.In the case of an application under subsection (1) (b), refund the overpaid tax within a period of six months from the date of the ascertainment and, if the Commissioner fails to refund, the overpaid tax shall be applied to offset the taxpayer’s outstanding tax debt or future tax liabilities.”

63. The provisions of Section 47 (5) are also pertinent. The section provides as follows;“(5)Where the application is for a refund of tax under subsection (1) (b), the commissioner shall apply the overpayment in the following order –a.In payment of any other tax owing by the taxpayer under the specific tax law;b.In payment of a tax owing by the taxpayer under any other law; and,c.Any remainder shall be refunded to the taxpayer.”

64. The aforesaid provisions clearly stipulate the steps the Respondent ought to follow while processing a taxpayer’s refund claim for taxes paid in error or overpaid taxes. Where a refund is ascertained and approved, the provisions of Section 47 (5) outline the order in which the Respondent may apply the refund for offset;“(a)in payment of any other tax owing by the taxpayer under the specific tax law;(b)In payment of a tax owing by the taxpayer under any other law; and,c.Any remainder shall be refunded to the taxpayer.”

65. It is not in dispute herein that the Appellant’s income tax refund claim for taxes paid in error was duly ascertained and approved for refund by the Respondent. The dispute is as pertains the modality of payment.

66. To our mind, it is incumbent upon the Respondent, having approved the Appellant’s claim for taxes paid in error, to employ the most appropriate mode of disbursement of refund within the applicable circumstances of the Appellant, noting that the Appellant is tax exempt, thus incapable of accruing any tax liabilities in its current state. Therefore, the Respondent’s action of issuing the Appellant with a refund offset voucher is an exercise in futility.

67. That said, it is imperative for this Tribunal to examine whether it is vested with the requisite mandate to intervene in the instant circumstances. For this Tribunal to intervene, the Appellant’s Appeal must be founded on an appealable decision validly made by the Respondent, otherwise referred to as a “Refund Decision.”

68. Section 3 (1) of the TPA defines a refund decision as a decision referred to in Section 47 (3) of the TPA. The cited section provides;“(3)The Commissioner shall notify in writing an applicant under section (1) of the decision in relation to the application within ninety days of receiving the application for refund.”

69. The foregoing connotes in essence, the ascertainment, either approval or rejection, and communication of the refund claim decision, within ninety days as constituting of the refund decision, which by extension constitutes the appealable decision.

70. Based on the facts adduced herein, the Respondent duly ascertained and approved the Appellant’s refund claim and communicated the same within the stipulated timeframe, thus there is no dispute regarding the Refund Decision.

71. Subsequently, the Respondent issued the Appellant with Refund Offset Voucher, which is a system credit to facilitate the Appellant to offset its refund credit against any current and future taxes. And as the Appellant did not have any existing or prospective future tax liabilities, this dispute ensued.

72. As highlighted hereinabove, the Refund Decision rests with the Commissioner ascertaining, and either approving or rejecting the refund claim within ninety days as well as communicating the same to the claimant. The Tribunal’s view is that the modalities and mechanics of implementing the Refund Decision does not constitute of the Refund Decision, and therefore not an appealable decision.

73. Flowing from the foregoing, the Tribunal is persuaded that the Appellant’s Appeal herein is therefore not anchored on an appealable decision capable of being determined by this Tribunal.

74. In light of the foregoing the Tribunal finds and holds that the Appellant’s Appeal is not anchored upon a valid appealable decision as required by law and the Appeal is therefore incurably defective.

75. The upshot of the foregoing is that the Appellant’s Appeal is not competently before the Tribunal and consequently fails.

76. The Tribunal having held that there was no appealable decision, it shall not delve into the other issue as the same has been rendered moot.

Final Determination 77. The Appellant’s Appeal being incompetent, the Tribunal makes the following orders;a.The Appellant’s Appeal be and is hereby struck out;b.The parties to bear their own costs.

78. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 21ST DAY OF FEBRUARY 2025. ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERJEPHTHAH NJAGI - MEMBERDELILAH K. NGALA - MEMBERDR TIMOTHY B. VIKIRU - MEMBER