[2025] KETAT 123 (KLR)

Salaam Microfinance Bank Limited v Commissioner of Domestic Taxes (Tax Appeal E263 of 2024) [2025] KETAT 123 (KLR) (7 February 2025) (Judgment)

Neutral citation: [2025] KETAT 123 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E263 of 2024

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

February 7, 2025

Between

Salaam Microfinance Bank Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company regulated by the Central Bank of Kenya under the Microfinance Act, CAP 493C of the Laws of Kenya and licensed by the Capital Markets Authority (hereinafter “CMA”) to operate as an investment bank under the Capital Markets Act Cap 485A of the Laws of Kenya and the corresponding CMA regulations.

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. The Respondent conducted a comprehensive audit on the tax affairs of the Appellant which resulted into a notice of assessment issued dated 30th October 2023 for Value Added Tax (VAT) and Pay as You Earn (PAYE) income tax for the years 2018 to 2022 in the sum of Kshs. 41,217,753. 00 inclusive of penalties and interests.

4. The Appellant was dissatisfied with the said assessments and objected to the default assessments vide notice of objection dated 22nd November 2023. The Respondent reviewed the Appellant's objection and issued its decision dated 19th January 2024 wherein it confirmed the assessments of the sum of Kshs 27,388,232. 00 being the principal sum of the tax assessed alongside penalties and interest.

5. Being dissatisfied with the Respondent’s objection decision, the Appellant filed the instant Appeal through the notice of appeal dated 19th February 2024 and filed on the even date.

The Appeal 6. The Appellant filed its Memorandum of Appeal dated 4th March 2024 on even date raising the following grounds of appeal:Payea.That the Respondent erred in law and in fact by failing to offset the assessed PAYE of Kshs 696,376. 00 from the available credit of Kshs 1,096,072. 00 under the Advance Tax Ledger.b.That the Respondent erred in law by purporting to assess PAYE of Kshs 22,325,032. 00 on the consideration for the sale of shares in Uwezo Microfinance Bank Limited (hereinafter “UMBL”); which consideration does not qualify to be subjected to PAYE under section 35 of the Income Tax Act, Cap 470 of the laws of Kenya (hereinafter “ITA”).Excise Dutya.That the Respondent erred in law by charging excise duty on penalty interest which is a non-excisable income under the enabling law paragraph 4 Part Il of the First Schedule of the Excise Duty Act, CAP 472 of the Laws of Kenya (hereinafter “EDA”).b.That the Respondent erred in law and fact by charging excise duty on the interest income arising from monies deposited with Commercial Banks.

Appellant’s Case 7. In support of the appeal, the Appellant flied its statement of facts dated 4th March 2024 on the even date. The Appellant also filed written submissions on 27th September 2024.

8. The Appellant’s case was that in 2023, the Respondent conducted a compliance check into its affairs for the period 2018-2022, culminating in the issuance of its tax assessment through a letter dated 30th October 2023 wherein the Respondent demanded a total tax of Kshs 41,217,753. 00 inclusive of penalties and interests in respect of PAYE, VAT and excise duty. Subsequently, the Appellant objected on 22nd November 2023 articulating its arguments and providing supporting documentation against the taxes assessed and demanded by the Respondent.

9. The Respondent issued its decision on 19th January 2024, wherein the assessment was revised from principal amount of Kshs 29,883,892. 00 to principal amount of Kshs 27,388,232. 00 The reduction on the assessed amount was attributable to the Appellant acknowledging VAT amount of Kshs 2,495,660. 00 as properly due and proceeded to settle the same in accordance with the provisions of section 52 (2) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).

10. In support of the contention that the Respondent erred in law and in fact by failing to offset the assessed PAYE of Kshs 696,376. 00 from the available credit of Kshs 1,096,072. 00 under the advance tax ledger, the Appellant stated that the Respondent in its objection decision in confirming the assessment contended that: 'there is a variance between the staff costs as per the trial balances vis a vis the staff costs as per the iTax declarations’. The Respondent further noted that 'the variance amount to a tax payable of Kshs 696,376. 00 while the amount paid was Kshs 1,096,072. 00 Therefore the Respondent averred that it was unable to reconcile the variance amount as they do not match'. In confirming the assessment, the Respondent stated its finding that, ‘we note that the advance payment can be offset at any time and advised to offset the advance tax against the assessed amounts.’

11. The Appellant contended that the Respondent's objection decision seemed to confirm the assessment while its explanations and statement of findings supported the Appellant's contentions as stated in its objection. The Appellant averred that the Respondent fell into grave error in confirming the assessment when in fact the Appellant was in a credit position as reflected in its advance ledger; a fact that was admitted to and confirmed by the Respondent.

12. The Appellant asserted that it had paid Kshs 1,096,072. 00 in its advance ledger that the Respondent could have utilized to offset the assessed PAYE liability as provided for in section 47 of the TPA.

13. The Appellant, asserted that as a taxpayer, it meticulously adhered to legal obligations of deducting PAYE from the salaries of its employees. According to the Appellant, this action demonstrated its commitment to compliance with tax laws and regulations.

14. The Respondent in disregarding the inclusion of PAYE credits totalling Kshs 1,096,072. 00 in the advance tax ledger made a factual error that directly affected the Appellant. The failure to consider the PAYE credits in its tax assessment, inaccurately inflated the tax liability of the Appellant, potentially leading to unjust financial burdens and penalties.

15. The Appellant asserted that the Respondent had the option of offsetting the tax payable amount of Kshs 696,376. 00 with the existing credit of Kshs 1,096,072. 00 available in the advance tax ledger. Noting that the Respondent's own statement of findings underscored this position it stands to reason that the Respondent ought to have utilized the overpayments to offset the assessed PAYE liability.

16. In view of the foregoing, the Appellant humbly implored the Tribunal to find that the Respondent erred in law by failing to take into consideration its credit position and by further failing to offset the assessed PAYE liability against its tax overpayments.

17. The Appellant asserted that the Respondent erred in law by purporting to assess PAYE of Kshs 22,325,032. 00 on the consideration for the sale of shares in Uwezo Microfinance Bank Limited; which consideration does not qualify to be subjected to PAYE under section 35 of the ITA. The Appellant asserted that Salaam African Bank Limited the Appellant's holding/parent company (Salaam Bank) executed a Share Purchase Agreement (hereinafter “SPA”) with UMBL on 1st September 2020 for the acquisition of shares in UMBL. As a precondition of the sale, the parties mutually agreed under clause 4 of the SPA that the purchase consideration would consist of Kshs 120,000,000. 00 out of which:a.The aggregate amount of the adjusted outstanding liabilities determined in accordance with the provisions of clause 4. 4 would be payable by the Purchaser into the Escrow Account in accordance with the provisions of clause 7. 2.2. 3 and held in the Escrow Account in accordance with the provisions of clause 4. 2 (the Retention Sum); andb.The balance being the difference between (a) Kenya Shillings one hundred and twenty million (KES 120,000,000. 00) and (b) the Adjusted Outstanding Liabilities determined in accordance with the provisions of clause 4. 4 shall be payable by the Purchaser to the Vendors' Advocates on the Completion Date in accordance with the provisions of clause 7. 2.2. 2 (the Completion Date Consideration); andc.The moneys recovered by the Company within the period of twenty-four (24) months from the completion date (the Loan Book Collection Period) of the outstanding facilities on the Loan Book (less all costs incurred by the Company in undertaking such collection) (the Deferred Consideration).

18. The Appellant argued that the consideration of the sale of the shares of UMBL took a structured format, a portion of which was deferred (Deferred Consideration/Loan Book) and was contingent on future possibility of the Appellant herein undertaking collection efforts in respect of the non-performing facilities.

19. The Appellant averred that the Respondent's confirmed assessment which sought to impose PAYE on part of the consideration derived from the sale of shares in UMBL on the premise that such consideration constituted a benefit accruing to the former shareholders, was fundamentally flawed and contravenes the provisions of section 37 of the ITA as well as the Income Tax (PAYE) Rules (the PAYE Rules).

20. The Appellant cited section 37 of the ITA which stipulates as follows:‘‘37. Deductions of tax from emoluments1. An employer paying emoluments to an employee shall deduct therefrom, and account for tax thereon, to such extent and in such manner as may be prescribed.’’

21. The Appellant also cited the PAYE Rules which define emoluments as follows:“Emoluments" meansa.gains or profits from employment or services rendered which are payable in money; andb.the value of housing provided by an employer ascertained under section 5(3) of the Act; andc.The value of benefit or facility provided by the employer, where the total value exceeds three thousand shillings per month.’’

22. The Appellant averred that the language of section 37 of the ITA as read with the definition of emoluments under the PAYE Rules clearly stipulates and refers to 'an employer paying emoluments to an employee'. It argued that in order for the Respondent to rely on and apply section 37 of the ITA, it must first as a matter of course establish the existence of an employer-employee relationship. It would therefore be improper to imply or read into this provision any other relationship other than an employer or employee, as the section bespeaks solely of the existence of an employment relationship. To imply any other relationship, violates the clear words of the statute and the principles of interpretation of tax statutes

23. In the context of this Appeal, the Appellant pointed out that the Respondent had not imputed an employer - employee relationship between the Appellant and the shareholders of UMBL to justify the imposition of PAYE on the consideration for the sale of shares. As such, the Appellant contented that the Respondent's reliance on section 37 of the ITA was misplaced and a clear indication of the Respondent's intent to illegally collect taxes.

24. According to the Appellant, the sale of shares in UMBL would from a tax perspective only trigger Capital Gains Tax (CGT). The Appellant noted that no gain was realized from the sale of the shares as UMBL was in a loss position and as such CGT could not be collected.

25. Further, it maintained that majority of the deferred consideration remains unrecoverable owing to the fact that it was pegged on recoverability of non-performing loan/facilities extended by UMBL to its customers. The Appellant also averred that deferred consideration/ loan book consisted of a principal amount of Kshs 71,321,816. 00 and interest of Kshs 17,978,313. 00 The Appellant maintained that these principal and interest amounts remain irrecoverable at large, details of which are provided below:a.Principal of Kshs 71,321,816. 00—the Appellant averred that part of the Deferred Consideration consists of the principal amounts/sum lent by UMBL to its clients. These amounts in the first instance remain unrecoverable owing to their non-performing nature.b.Notwithstanding the recoverability, the Appellant averred that these being the principal portion of the facilities extended by UMBL to its clients do not, in the first instance, qualify to be subjected to tax. Accordingly, the Appellant expended sufficient and reasonable effort to recover the loan with not much success.c.Interest of Kshs 17,978,313. 00—the Appellant averred that this amount remains unrecoverable owing to its non-performing nature. The Appellant stated that a non-performing loan under rule 2 of the Microfinance (Deposit-Taking Microfinance Institution) Regulation, 2006 (Microfinance Regulations) is defined as a credit facility that is not generating income and the principal or interest is due and unpaid for more than 30 days and includes a loan or a credit facility classified either as sub-standard, doubtful or loss.d.The Appellant relied on Regulation 48 (1) of the Microfinance Regulations which provides for suspension of the interest from non-performing loans as follows:1. Where a loan is classified as non- performing every institution shall suspend any interest on such loan and advances and-a.The interest in suspense shall not be treated as income; andb.All interest in suspense shall be taken into account in the computation of provisions for non-performing accounts; andc.Reverse any interest on non-performing loans.”

26. The Appellant asserted that non-performing loans did not generate any taxable income in the form of interest, hence no interest existed to form part of the benefit to the shareholders consequently warranting the Respondent to subject the said amount to PAYE. It added that if at all the loan book containing the principal and interest amounts were not to be considered as deferred consideration, the said amounts would have been provided for as doubtful debts in the books for Salaam Microfinance Bank Limited and formed part of allowable expenses.

27. The Appellant maintained that the Respondent erred in law by charging excise duty on penalty interest which is a non-excisable income under the enabling law paragraph 4 Part Il of the First Schedule of the EDA. The Appellant averred that the Respondent failed to appreciate the nature of the other incomes before proceeding to place it within the ambit of paragraph 4 Part Il of the First Schedule to the EDA. The Appellant asserted that paragraph 4 Part ll of the First Schedule to the EDA provides as follows:‘‘Excise duty on other fees charged by financial institutions shall be twenty percent of their excisable value.’’

28. It contended that penalty interest in this appeal related to penalty interest incurred by clients of UMBL for defaulting in the payment of monthly repayments of loans/credit facilities. The Appellant also stated that the Respondent failed to consider that the Appellant's Audited Financial Statements (AFs) contained a line item known as Fees and Commissions income which consisted of both excisable and non-excisable income. This line item lumped up several incomes including but not limited to loan processing fees, other non-interest income and commissions, transactional processing fees and penalty interest.

29. The Appellant added the Respondent ought to, in the first instance, understand the nature of each of these lines of income before arbitrarily charging excise duty on the entire amounts so reported. The Appellant contended that had the Respondent purposed to separate these incomes into excisable and non-excisable, it would have easily concluded that the penalty interest is not subject to excise duty.

30. With regards to penalty interest received by the Appellant, the Appellant asserted that it is exempt from excise duty under Paragraph 4 Part Il of the First Schedule to the EDA which excludes interest from the scope of the excise duty regime. To further demonstrate on this issue, the Appellant stated that it had adjusted for the non-excisable items by removing the penalty interest in order to compute the Appellant's adjusted excisable income which the Appellant maintained that it was timeously remitted to the Respondent. The Appellant averred that once the adjustment is effected, no additional excise duty is payable for the years 2018 and 2019.

31. Apart from the foregoing, the Appellant asserted that the Respondent erred in law and in fact by charging excise duty on the interest income arising from monies deposited with Commercial Banks. The Appellant stated that the Respondent erroneously concluded that the interest received by the Appellant from its deposits with commercial banks are subject to excise duty and that the Appellant received net of withholding tax amount of Kshs 1,981,781. 00 (gross amount Kshs 2,331,507. 00) and Kshs 167,902. 00 (gross amount Kshs 197,531. 00) from DIB Bank Kenya Limited and DTB Kenya Limited respectively.

32. The Appellant herein alleged that it adjusted in the year 2021, an aggregate interest income from the deposits in commercial banks of Kshs 2,149,683. 00 by excluding it from the excisable value according to the Respondent. It averred that once the adjustment is effected, no additional excise duty is payable for the year 2021.

33. The Appellant also averred that the interest earned from its deposits with these commercial banks does not fall within the ambit of the EDA and as such the Respondent by erroneously assessing excise duty on this interest is illegally expanding the scope of the EDA. Further, the Appellant averred that the Commercial Banks rightfully withheld and remitted withholding tax on this interest income as required by the law. Therefore, the Appellant argued that the Respondent subjected the Appellant's income to excise duty was not only double taxation but also punitive.

34. The Appellant filed written submissions and in support of its position that the Respondent erred in law and in fact by failing to offset the assessed PAYE of KES 696,376. 00 from the available credit of KES 1,096,072. 00 under the Advance Tax Ledger, the Appellant submitted that the Respondent treated the Appellant unfairly. It relied on the case of Samuel Njoroge and 4 Others v Attorney General & another [20171 eKLR to term the Respondent’s decision as unreasonable. The Appellant also cited the decision in R v Inland Revenue Commissioners exp National Federation of Self Employed and Small Business Limited [1981| UKHL 2 where the Court stated that the modern case law recognises a legal duty owed by the Revenue authority to the general body of the taxpayers to treat taxpayers fairly.

35. In support of its position that the Respondent erred in law by purporting to assess PAYE of Kshs 22,325,032. 00 on the consideration for the sale of shares in UMBL; which consideration does not qualify to be subjected to PAYE under section 37 of the ITA, the Appellant submitted that from a plain reading of section 37 of the ITA, it is crystal clear that the wording of the ITA was only envisioned to apply to instances where there exists an employee-employer relationship.

36. The Appellant relied on the case of China Road & Bridge Corporation v Commissioner of Domestic Taxes [2021] eKLR where the court stated as follows:“Turning to the matter at hand, the basis of PAYE is section 37 (1) of the ITA, the clear language of this provision refers to “An employer paying emoluments to an employee" It would therefore be improper to imply or read into this provision any other relationship other than an employer or employee. To do so violates the clear words of the statute. It also violates the principles of interpretation of tax statutes.’’

37. The Appellant also relied on the case of Republic v Commissioner of Domestic Taxes Large Tax payer's Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR; Adamson v Attorney General (1933) AC 257; CIT V. B.C. Srinivasa Setty (1981); and CIT v. Mahindra & Mahindra Ltd (2018) and CIT v Tosha International (2008) to support its position that the Respondent erred in law by charging excise duty on penalty interest which is a non-excisable income under the enabling law paragraph 4 Part II of the First Schedule of the EDA, the Appellant relied on the case of Cooperative Bank of Kenya v Commissioner of Domestic Taxes TAT No. 45 of 2017 and Commissioner of Domestic Taxes v Key Microfinance Bank Limited (Tax Appeal E031 of 2022) [20231 KEHC 19067 (KLR) where the Tribunal and the court relied on the meaning of interest as defined under ITA.

38. Finally, the Appellant reiterated that the Respondent erred in law and in fact by charging Excise Duty on the Interest Income arising from monies deposited with Commercial Banks. In support of this issue, the Appellant relied on the cases of Commissioner of Domestic Taxes v Key Microfinance Bank Limited (Tax Appeal E031 of 2022) [2023] KEHC 19067 (KLR) and Republic v Kenya Revenue Authority Ex-parte Bata Shoe Company (Kenya) Limited 2014] eKLR.

Appellant’s Prayers 39. The Appellant made the following prayers to the Tribunal:i.That the Respondent's objection decision contained in the letter dated 19th January 2024, demanding payment of Kshs 27,388,232. 00 be set aside in its entirety.ii.That the Appeal be allowed with costs to it.iii.Any other orders and/or remedies that the Tribunal deems just and reasonable.

The Respondent’s Case 40. In response to the appeal, the Respondent filed a statement of facts dated 1st April 2024 on 6th April 2024.

41. The Respondent stated that it exercised its best judgment in making the assessment in full consideration of the documentation and information available pursuant to Section 31 of the TPA.

42. On the issue of the PAYE assessment, the Respondent stated that it established a variance between staff costs as per the trial balances and the staff costs as per the iTax declarations.

43. The Respondent averred that the Appellant provided a Payment Registration Number (PRN), of an amount that was paid as advance tax and that the Appellant at the objection stage stated that it had omitted a non-resident employee who did not have a PIN when filing on i-TAX but paid the PAYE as an advance tax.

44. The Respondent reviewed the variance amounts to tax payable of Kshs 696,376. 00 while the amount paid in advance was Kshs 1,096,072. 00 and was of the view that it was not possible to reconcile the same as they do not match. The Respondent further alleged that it advised the Appellant to offset the advance tax against the assessed amounts.

45. With regard to the loan book taken over by former shareholders, the Respondent asserted that it was not in dispute that the SPA states that the former shareholders were to get UMBL loan book as part of the purchase consideration. According to the Respondent, this meant that the loan book ceased to appear in the Appellant's books whereas the former shareholders were to continue receiving principal loan repayments as well as the applicable interest. It added that the UMBL loan book's closing balance as at the time of the purchase was Kshs 71,321,816. 00 and the interest receivable was Kshs 17,978,313. 00 making a total of Kshs 89,300,129. 00.

46. Whereas the Appellant averred that the Kshs 89,300,129. 00 was in lieu of a cash payment, however the Respondent contended that by dint of the provisions of Section 37 of the ITA, as long as the arrangement was one that benefited the UMBL shareholders the Appellant ought to have withheld the PAYE on that benefit. The Respondent therefore, contended that it was justified in raising the PAYE assessments and further issuing the decision of 19th January 2024.

47. With regard to excise duty, the Respondent alleged that it reviewed the Withholding Tax returns filed by the Appellant and other information availed to it for the period of 2018 to 2022 to determine whether the correct and complete declarations were made and excise duty payable remitted in line with the EDA.

48. The Respondent alleged that in its reconciliation of the excisable values as per the Appellant's books against the excisable values as per the Appellant's returns, established a variance indicating an under declaration.The Respondent stated that it reviewed the documents availed including audited financial statements and noted that the fees and commission ledger was broken into penalty interest and write back, processing fees income, insurance income and other operating income.

49. The Respondent noted that the nature and character of the items listed under penalty interest were basically charges exerted by the Appellant on its members and did not meet the threshold for other fees exempted from excise duty in line with the definition of 'other fees' in the EDA.

50. It contended that it considered all material information in raising the assessment including the new developments and changes since the introduction of excise duty on financial services including the changes in excise duty rates, the definition of other fees to exclude loan related fees and removal of fees or commissions earned in respect of a loan from the fees exempt from excise duty. The Respondent therefore, contended that it was justified in charging excise duty on the incomes and further issuing the decision of 19th January 2024.

51. Finally, the Respondent stated that the Appellant has failed to discharge its burden to prove that the assessments were excessive or improper in line with the provisions of Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”). The Respondent therefore, stated that this Appeal is unmeritorious because the assessments and the subsequent objection decision is proper and duly anchored in law.

Respondent’s prayers 52. The Respondent prayed for the Tribunal to uphold the Respondent's decision as proper and in conformity with the provisions of the Law and dismiss the Appeal.

Issues For Determination 53. The Tribunal having carefully evaluated parties’ pleadings is of the view that the following four issues call for its determination:a.Whether the Respondent erred by failing to offset the assessed PAYE of Kshs 696,376. 00 from the available credit of Kshs 1,096,072. 00 under the advance tax ledger.b.Whether the SPA constituted an employee share ownership plan.c.Whether the Respondent erred by charging excise duty on penalty interest; andd.Whether the Respondent erred by charging excise duty on the Interest Income arising from monies deposited with commercial banks.

Analysis And Findings 54. The Tribunal will proceed to analyse the issues as hereinunder:a.Whether the Respondent erred by failing to offset the assessed PAYE of Kshs 696,376. 00 from the available credit of Kshs 1,096,072. 00 under the advance tax ledger.

55. The Appellant accused the Respondent of failing to offset the assessed PAYE of Kshs 696,376. 00 from the available credit of Kshs 1,096,072. 00 under the advance tax ledger even though the Respondent admitted that the advance payment could be offset at any time and are advised to offset the advance tax against the assessed amounts. The Appellant asserted that the Respondent ought to have offset the amount under section 47 of the TPA. The Tribunal examined the Respondent’s pleadings and noted that the Respondent at paragraph 15 of its statement of facts stated as follows:‘‘The Respondent further advised the Appellant to offset the advance tax against the assessed amounts.’’

56. The procedure for Offset or refund of overpaid tax is provided for under section 47 of the TPA. In particular, section 47(1) and (2) provides as follows:‘‘47. Offset or refund of overpaid tax1. Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the Commissioner, in the prescribed form—a.To offset the overpaid tax against the taxpayer's outstanding tax debts and 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.2. The Commissioner shall ascertain and determine an application under subsection (1) within ninety days…’’

57. The Tribunal notes that the law is set in mandatory terms. The Appellant must apply to the Respondent in the form prescribed under Section 47 of TPA. The Respondent must upon receiving such an application, make a decision within ninety days. If the Appellant is dissatisfied by this decision, section 47(13) of the TPA provides as follows:‘‘(13) A person aggrieved by a decision of the Commissioner under this section may appeal to the Tribunal within thirty days after being notified of the decision.’’

58. The Tribunal has canvased the bundle of documents provided in support of the Appellant’s case and notes that the Appellant has not adduced any record to show that it made an application to the Respondent under section 47(1) of TPA seeking to offset the overpaid tax. In the absence of such an application, or a decision by the Respondent refusing to action the said application, means that the Tribunal lacks jurisdiction to make a determination on the matter of “offset of tax” and accordingly it downs its tools.b.Whether the SPA constituted an employee share ownership plan.

59. The Appellant averred that the Respondent of assessed PAYE of Kshs 22,325,032. 00 on the deferred consideration for the sale of shares in UMBL yet the consideration did not qualify to be subjected to PAYE under section 37 of the ITA. Inversely, the Respondent argued that under Section 37 of the ITA, as long as the arrangement was one that benefited the UMBL shareholders, the Appellant ought to have withheld the PAYE on that benefit.

60. Pursuant to section 2 of the ITA the term employer has the following meaning:“employer" includes any resident person responsible for the payment of, or on account of, any emoluments to any employee, and any agent, manager or other representative so responsible in Kenya on behalf of any non-resident employer.

61. The term “employee” has the following meaning pursuant to the Income Tax (PAYE) Rules :“"employee" includes an individual receiving emoluments in respect of any employment, office, appointment or past employment”

62. The Tribunal notes that emoluments received by an employee are subject to PAYE and it is the employer’s responsibility to deduct PAYE pursuant to the following provisions of section 37 (1) of the ITA:‘‘37. Deductions of tax from emoluments1. An employer paying emoluments to an employee shall deduct therefrom, and account for tax thereon, to such extent and in such manner as may be prescribed.’’

63. The Tribunal, having reviewed the SPA dated 1st September, 2020 which was adduced by the Appellant as evidence notes that the Vendors who sold the shares of UMBL to the Appellant were described as shareholders. The Tribunal also notes that the Appellant failed to attach page 41 of the SPA which would have outlined the particulars of the shareholders of UMBL and a review by the Tribunal of the same would have established whether or not the persons listed therein were shareholders.

64. The Tribunal further notes and observes that the Appellant did not provide an Official Search of UMBL to prove that the persons listed as “Vendors” in the SPA were the shareholders of UMBL. The Respondent also merely asserted, in its pleadings, the fact that the deferred consideration payable to the Shareholders of UMBL was a benefit from which PAYE ought to have been deducted.

65. The Tribunal can however infer that the Respondent’s view was that the SPA was an employee stock ownership plan and that the taxation of such a benefit would be in accordance with the provisions of Sections 5 (5) and (6) of the ITA and that further the Appellant ought to have been deducting PAYE on payments made to the Shareholders. In doing so, the Respondent construed the payments received by the shareholders of UMBL, the deferred consideration, as being an employment benefit, which view is absurd.

66. The view of the Tribunal is that the SPA at Clause 1. 1.38 on page 5 provides that an employer-employee relationship could only have been established by a person who has an employment contract with UMBL. The Respondent could have provided employment contracts to controvert the Appellant’s assertion that the payment of deferred consideration was made to Shareholders but it did not.

67. The Tribunal notes that the Respondent by assessing the Appellant subjected it to unlawful tax obligations as held in the oft cited case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB as applied in T.M. Bell v Commissioner of Income Tax [1960] EALR 224 where Roland J. stated as follows:“…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 it to be implied. One can only look fairly at the language used… If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

68. The Tribunal also cites the case of China Road & Bridge Corporation v Commissioner of Domestic Taxes [2021] eKLR regarding the application of the provisions of section 37 of ITA. The fact that Section 37 of the ITA applies where there is an employer-employee relationship was upheld in this case. The Court also held as follows at paragraph 40 of the Judgement:‘‘I therefore find and hold that section 37 of the ITA bespeaks an employer-employee relationship. Since CRBC was not an employer, it was not under a statutory obligation to deduct and remit any tax in accordance with section 37(1) of the ITA.’’

69. The Tribunal consequently finds that the SPA did not constitute an employee share ownership plan and that accordingly the Respondent erred by assessing PAYE of Kshs 22,325,032. 00 on the deferred consideration paid to shareholders for the sale of shares in UMBL when it ought to have considered whether the Appellant had any Capital Gains Tax obligations.c.Whether the Respondent erred by charging excise duty on penalty interest.

70. It was the Appellant’s case that the Respondent erred in law by charging excise duty on penalty interest which is a non-excisable income under paragraph 4 Part Il of the First Schedule of the EDA. The Respondent however submitted that the nature and character of the items listed under penalty interest were charges exerted by the Appellant on its members and did not meet the threshold for other fees exempted from excise duty in line with the definition of 'other fees' in the EDA.

71. Paragraph 4 Part Il of the First Schedule of the EDA provides as follows:“Excise duty on other fees charged by financial institutions shall be twenty percent of their excisable value.’’

72. Part III on Interpretation of Schedule to EDA defines ‘other fees’ as follows:“‘other fees’ includes any fees, charges or commissions charged by financial institutions relating to their licensed activities, but does not include interest on loan or return on loan or any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations made thereunder.’’

73. The Appellant urged this Tribunal to rely on the definition of ‘interest’ under the ITA since EDA does not define the term ‘interest.’ The Appellant cited the case of Cooperative Bank of Kenya v Commissioner of Domestic Taxes TAT No. 45 of 2017 wherein the Tribunal relied on definition of ‘interest’ under ITA when interpreting the meaning of ‘interest’ under EDA.

74. In Commissioner of Domestic Taxes v Co-operative Bank of Kenya Limited (Tax Appeal E095 of 2020) [2022] KEHC 15973 (KLR) the Court stated as follows:‘‘I therefore agree with the court’s pronouncement in National Bank of Kenya Ltd v Commissioner of Domestic Taxes which also stated as follows: The definition of interest in the Income Tax Act should not have been resorted to in ascertaining the intention of Parliament in Section 7 of the Finance Act, 2013. In the Income Tax Act, the term interest is used for the purposes of charge, assessment and collection of income tax; for the ascertainment of the income to be charged; for the administrative and general provisions relating thereto and for matters incidental to and connected therewith and not otherwise.22. I therefore reject the Tribunal’s decision to apply the definition of “interest” under section 2 of the ITA. A strict interpretation of the Finance Act, 2013 coupled with a plain and literal interpretation of the term “interest” meant that all fees incidental to obtaining a loan such as moratorium, loan appraisals and applications, loan negotiations, mortgage commitment, micro-enterprise among others would be subjected to Excise Duty while the interest earned from the loan would be exempted.’’

75. In addition to the forgoing, the High Court in Commissioner of Domestic Taxes v Stima Cooperative Savings & Credit Society Limited (Tax Appeal E090 of 2021) [2022] KEHC 12993 (KLR) stated as hereunder:‘‘In its judgment, the tribunal relied on the definition of interest under the Income Tax Act on the ground that it was not defined under the Excise Duty Act.34. The view I take is that, the tribunal need not have looked for the definition of interest in the Income Tax Act. Before going out of the Excise Duty Act to look for the definition of interest, there should have been difficulty first as to what parliament’s intention was. The term ‘interest’ should have been given its plain and literal meaning before seeking its legal meaning or definition in statutes….’’

76. Similarly, the Court in Commissioner of Domestic Taxes v National Bank of Kenya [2022] eKLR held as follows:“From the foregoing, it is crystal clear that interest is the compensation paid in consideration of using someone else’s money. Or put differently, it is the consideration that is paid for keeping someone out of the use of his money. It is payable both when a lender lends money to a borrower or a lender takes a deposit from a depositor.”

77. The Respondent stated that what the Appellant referred to as penalty interest were charges exerted by the Appellant on its members and did not meet the threshold for other fees exempted from excise duty, while on the other hand the Appellant contended that penalty interest in this appeal is related to penalty interest incurred by clients of UMBL for defaulting in the payment of monthly repayments of loans/credit facilities.

78. The Tribunal observes that the Appellant is in the business of lending money and it follows that where borrowers default, the Appellant is entitled to charge an interest for the loss of use of its money.

79. Consequently, the Tribunal finds and holds that the Respondent erred by charging excise duty on penalty interest.d.Whether the Respondent erred by charging excise duty on the interest income arising from monies deposited with commercial banks.

80. The Appellant has in this Appeal, availed withholding tax certificates in support of the assertion that it received interest on deposits net of withholding tax from DIB Bank Ltd and DTB Kenya LTD. The Tribunal notes that the High Court has already given guidance on the meaning of the term “interest” for purposes of the EDA in the cases Commissioner of Domestic Taxes v Co-operative Bank of Kenya Limited (Tax Appeal E095 of 2020) [2022] KEHC 15973 (KLR); Commissioner of Domestic Taxes v Stima Cooperative Savings & Credit Society Limited (Tax Appeal E090 of 2021) [2022] KEHC 12993 (KLR) and Commissioner of Domestic Taxes v National Bank of Kenya [2022] eKLR.

81. Section 9(6) of the EDA provides as follows:‘‘The excisable value of excisable services specified in item 4 of Part II of the First Schedule shall not include interest or an insurance premium.’’

82. The Tribunal notes the provisions of Paragraph 4, Part Il of the First Schedule of the EDA that excise duty on ‘other fees’ charged by financial institutions is 20% of their excisable value. However, Part III of the EDA on Interpretation of the First schedule to EDA excludes interest on loan or return on loan from ‘other fees.’

83. Part III on interpretation of the First Schedule to the EDA defines “financial institution” as follows:a.a person licensed under—i.The Banking Act (Cap. 488);ii.The Insurance Act (Cap. 487);iii.The Central Bank of Kenya Act (Cap. 491); oriv.The Micro Finance Act (Cap. 493C);

84. The Appellant is Micro Finance Institution therefore, well covered under Paragraph 4 Part Il of the First Schedule to the EDA.

85. Pursuant to Section 9(6) of the EDA; and Paragraph 4 Part Il of the First Schedule to the EDA as read together with Part III on Interpretation of the First Schedule to the EDA, ‘interest’ is expressly excluded from excise duty. The Tribunal therefore finds that the certificates were adequate to enable the Respondent amend its assessments. The interest received from deposits is exempt from excise duty.

88. Consequently, the Tribunal finds that the Respondent erred by charging excise duty on the interest income arising from monies deposited with commercial banks.

Final Decision 89. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is meritorious and makes the following orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 19th January 2024 is set aside.c.Each party to bear its own cost.

90. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 7TH DAY OF FEBRUARY, 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER