[2024] KETAT 1058 (KLR)

Sayani Investments Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal E448 of 2023) [2024] KETAT 1058 (KLR) (19 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1058 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E448 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

July 19, 2024

Between

Sayani Investments Limited

Appellant

and

Commissioner Of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and deals with real estate activities with owned and leased Property.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. 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 6 April 2023, the Respondent carried out a compliance check and raised corporation tax, VAT and capital gains tax additional assessments. The Appellant lodged a late manual objection on 4th May 2023. The Respondent granted time extension on 12th May 2023 and according to the electronic mail record, the Appellant filed its valid objection on 16th May, 2023.

4. The Respondent confirmed the assessments through an objection decision dated 27th June 2023. The Appellant aggrieved by the objection decision, lodged its Notice of Appeal vide notice of appeal dated 25th July 2023 vide electronic mail on the same date.

The Appeal 5. The Appellant lodged the memorandum of Appeal dated 7th day of August 2023 and filed on 8th day of August 2023 raising the following grounds:i.That the Respondent erred in fact and in law in determining that Value Added Tax (VAT) was payable on the transfer of vacant land, contrary to the provisions of paragraph 8- Part Il of the first schedule to the Value Added Tax Act, CAP 476 of Kenya’s Laws (hereinafter “VAT Act”).ii.That the Respondent erred in fact and in law in determining that the time of supply of the subject property for VAT purposes was the point at which the Appellant entered into the Agreement for Sale with the buyer of the Land.iii.That the Respondent erred in fact in finding that the Appellant did not provide satisfactory evidence to support the execution and authenticity of the Agreement for Sale.iv.That the Respondent erred in fact in finding that the development and approval costs related to the architectural design, structural and mechanical engineering services for the erection of a new building to be set up on the subject property, had not been capitalized by the Appellant.v.The Respondent erred in fact and in law by demanding Corporate Income Tax in respect of development and approval costs related to the architectural design, structural and mechanical engineering services for the erection of a new building to be set up on the subject property as a result of its finding that the costs had not been capitalized by the Appellant.vi.That the Respondent erred in law and in fact by deciding on issues that it had not raised in its letter of assessment.

Appellant’s Case 6. In support of the Appeal, the Appellant lodged its statement of facts dated 7th August 2023 and filed on 8th August 2023 together with its written submissions dated and filed on 28th February 2024.

7. The Appellant stated that it was the owner of the parcels comprised in Land Reference Numbers 209/1913/2 and 3 (hereinafter “the Land”), on which there was a building named “Victoria House” (hereinafter “the Building”) that was constructed sometime in 1929.

8. Due to the aged and dilapidated state of the building, the Appellant was issued with a Notice dated 4 July 2016 to rehabilitate the building by the Public Health Department of the Nairobi City County Government (hereinafter “NCC”). In the Notice, the NCC instructed the Appellant to inter alia “replace the leaking roof with a new one", “repair the cracked wall surfaces of the building", “remove all the illegal structures within the building" and “remove all the mezzanine floor in the building which have not been approved."

9. On 23rd August 2016, the Public Health Department of the NCC instituted a suit against the Appellant before the Magistrate's Court in Nairobi registered as city court case number 258A of 2016 (hereinafter “the Suit”), through which it implored the Court to compel the Appellant to rehabilitate the building.

10. Due to the state of the Building, the Appellant earmarked the Building for demolition and thereafter re-development instead of rehabilitation. Consequently, the Appellant instructed Messrs. Knight Frank to conduct a valuation of the land to establish the value of the land with respect to the planned re-development. Messrs. Knight Frank issued a valuation report dated 31st January 2020.

11. On 2nd March 2020, a truck hit one of the pillars supporting the Building, substantially damaging it. On 3rd March 2020, the Appellant notified the NCC of the dire state of the building and requested them to survey the damage and issue approval for closure of the premises, demolition and total reconstruction of the entire canopy and the holding pillars, which were beyond repair.

12. Before the Appellant could re-develop the Land, it received an unsolicited expression of interest from a potential purchaser and after due consideration, it decided to sell (the Transaction) it to Accra Trade Centre Limited (the Purchaser). The Appellant and Purchaser executed an Agreement for Sale dated 9th July 2020 (the Agreement).

13. Through a professional undertaking, the Appellant's advocate held deposit on behalf of both the Appellant and the Purchaser and the Appellant asserted that the payment of the deposit to its Advocates did not amount to part payment of the purchase price.

14. On various dates between the date of acquisition of the Land and the date of disposal of the Land, the Appellant had incurred costs amounting to Kshs. 38,054,336. 20 relating to architectural design, structural, electrical and mechanical engineering services and government approvals (hereinafter “Development and Approval Costs”), for the reason that the Appellant had intended to re-develop the Land.

15. The Appellant argued that it was not disputed that these Development and Approval Costs were capital in nature. Given that the Building was constructed in 1929, the Appellant accumulated the costs incurred in its financial statements under the revaluation account.

16. Pursuant to the application by the Appellant, the NCC inspected the Building and granted the Appellant the demolition hoarding permit dated 28th September 2020 allowing the Appellant to demolish the Building. Thereafter, the Appellant contracted Preston Pointe Investments to demolish the building. Preston Pointe completed demolition of the building in early October 2020 and issued the Appellant with an invoice dated 27th October 2020. The NCC inspected the land and confirmed that the Building had been demolished. The NCC thereafter informed the Magistrate's Court of the demolition, and the Court closed the case against the Appellant on 16th October 2020.

17. According to the Appellant, having demolished the Building, one of the conditions for the sale of the Land, under the agreement had been met and the Appellant's Advocate proceeded to remit the deposit of Kenya Shillings Thirty Million to the Appellant. The deposit was paid in two (2) tranches of Kshs. 7,000,000. 00 on 26th November 2020 and Kshs. 23,000,000. 00 on 3rd December 2020.

18. Following the payment of the deposit, the Appellant handed over partially executed copies of the Transfer instruments dated 2nd December 2020 to the Purchaser to complete and file at the Land Registry. The Purchaser completed, paid stamp duty, franked and submitted the Transfer instruments together with the original titles to the Lands Registry on 4th January 2021 for registration and was issued with the Application for Registration form.

19. On 15th January 2021, the Purchaser's Advocates sent an electronic mail to the Appellant confirming that the registration of the Transfers in favour of the Purchaser at the Lands Registry was successful and the Purchaser instructed Equity Bank to remit the balance of the purchase price to the Appellant. The Appellant averred that Equity Bank remitted the balance of Kshs. 200,000,000. 00 to the Appellant on 11th February 2021.

20. Pursuant to the Eighth Schedule to the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) the Appellant stated that it computed the gain arising from the sale of the Land and paid Capital Gains Tax (CGT) to the Respondent amounting to Kshs.8,725,930. 00 on 18th January 2021.

21. The Respondent wrote to the Appellant via electronic mail on 1st February 2023 claiming that the just completed sale of the Land was underdeclared and demanded that the Appellant declares and settles the resultant tax or provides documentary evidence of the declaration of the sale. By electronic mails of 2nd February 2023 and 9th February 2023, the Appellant responded to the Respondent's electronic mail informing them that the transaction was a sale of Land and thus was exempt from Value Added Tax (VAT) and provided the CGT computation as well as supporting documents to demonstrate that the CGT was properly accounted for.

22. The Respondent issued the Appellant with a letter of preliminary findings dated 24th February 2023 and which the Appellant alleged that it was received on 27th February 2023. In the letter, the Respondent demanded VAT on the sale of the land on the basis that it was the sale of a commercial building, as well as CGT, VAT and corporation tax on the Development and Approval Costs. The Appellant responded to the Respondent's letter of preliminary findings by a letter dated 10th March 2023. The Respondent subsequently issued a Notice of Assessment dated 6th April 2023.

23. With regard to VAT on commercial building, the Respondent argued that at the time of supply of the property the Building had not been demolished and that pursuant to section 12 (d) of the VAT Act, the time of supply is the date that payment for a supply is received in whole or in part and therefore the time of supply of the property was when the deposit was received. Accordingly, VAT was due on the disposal of the Land as according to the Respondent the building was still in existence at the time of the supply of the Land.

24. With regards to VAT, corporation tax and CGT in relation to the Development and Approval Costs, the Respondent was of the opinion that, the Appellant supplied the development and approval plans for the erection of a new building to the Purchaser and sought to charge VAT on the basis that the Purchaser could not have obtained them at no cost; the Respondent also sought to charge corporation tax on the basis that this was a supply by the Appellant in the way of business where the aim of the Appellant was to make a profit; and that the Respondent disallowed the costs relating to Development and Approval Costs which the Appellant had taken into account in the computation of CGT on the basis that the costs were being incurred for the development of a new building and not the old building. The Appellant objected to these demands.

25. The Appellant submitted that the Respondent had erred in assessing VAT on the sale of the Land and VAT, CGT, corporation tax on the Development and Approval Costs. Consequently, the Respondent issued its objection decision.

26. The Appellant argued that the Respondent erred in fact and in law in demanding VAT on transfer of vacant land contrary to the provisions of Paragraph 8 Part Il of the first schedule of the VAT Act. The Appellant argued that Paragraph 8 of Part Il of the first schedule to the VAT Act, provides that the supply by way of sale, renting, leasing, hiring, letting of land or residential premises is exempt from VAT. The Appellant also averred that at the time of completion of the sale, the Land was vacant because the Building that had been erected on the Land had already been demolished. The demolition of the Building was confirmed by the Magistrate's Court in Nairobi, who in dismissing a suit against the Appellant in its order of 16th October 2020.

27. The Appellant’s case is that it was a pertinent pre-condition of the sale of the land that the Appellant shall demolish all the buildings that had been erected on the land prior to its transfer. Accordingly, the Appellant and Purchaser entered into an Agreement pursuant to which the Appellant was to sell the Purchaser vacant land. The Appellant argued that the intention of the parties cannot and should not be inferred, as it is clearly set out in the Agreement. This was because at the time of entering into the Agreement, the Building was uninhabitable and the Purchaser intended to redevelop the land. It would have been of no use to the Purchaser had they acquired it.

28. The Appellant stated that as per Clause 4. 4, 4. 4.1 and 4. 4.2 of the Agreement, the transfer instruments and original titles which are required to effect a transfer of title at the Ministry of Lands were handed over to the Purchaser after the building was demolished. The Appellant averred that it was only upon confirmation that the Building had been demolished that the deposits were released to them as stated in paragraph 17. The Appellant stated that the deposit would have been released much earlier if the Agreement was for the Purchaser to acquire the Building. Having established that the Building did not exist at the time of transfer of the Land to the Purchaser, the Appellant averred that the supply was that of vacant land and therefore the sale of the Land was exempt from VAT.

29. The Appellant maintained that the Respondent erred in fact and in law in determining that the time of supply of the Land for VAT purposes was the point at which the Appellant entered into the Agreement with the Purchaser. The Appellant relied on section 19 (1) of the VAT Act, VAT which provides that: “Tax shall be due and payable at the time of supply.” The Appellant relied on section 12(1) of the VAT Act to define ‘time of supply’ as follows:“(1)Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of-(a)The date on which the goods are delivered or services performed;(b)The date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;(c)The date on which the invoice for the supply is issued; or(d)The date on which payment for the supply is received, in whole or in part.”

30. The Appellant argued that what is relevant in this instance is the date of delivery of goods or the date on which payment for a supply is received because in the objection decision, the Respondent stated that according to them the Appellant supplied the Land on the date that they executed the Agreement.

31. The Appellant averred that the Respondent is misguided for the reasons set forth below:

32. The Appellant maintained that the Agreement does not constitute a supply of the land. According to the Appellant, pursuant to Recital E of the Agreement, the Transaction was to be completed on the terms as set out in the Agreement. The Recital provided as follows:“The Vendor (Appellant) has agreed to sell the Properties to the Purchaser and the Purchaser has agreed to purchase the Properties on the terms as set out in the Agreement.”

33. The Appellant averred that the transfer of the Land was to occur later upon the fulfilment of the conditions specified in the Agreement including the demolition of the Building. The title to the Land and possession of the Land remained with the Appellant until the conditions, including the demolition, were fulfilled until then there was no supply of the Land. The Appellant reiterates that the intention of the parties was clearly set out in the Agreement. The Appellant stated that it is only when the title in the Land passed to the Purchaser that the supply occurred which was on 4th January 2021 when the Purchaser was issued with a title to the Land pursuant to the Land Act, 2012. The Appellant further avers that at any point before the issue of the title to the Land, either party to the Agreement (the Appellant or Purchaser) could have rescinded the Agreement and there would have been no sale of Land.

34. The Appellant maintained that the time that the deposit was made to the Appellant's advocate is immaterial as it is not a payment to the Appellant. In the Objection Decision the Respondent alleged that the Appellant failed to provide evidence as to the time the Purchaser remitted the deposit of the purchase price to the Appellant's Advocate. However, the Appellant averred that the pre-conditions for the sale of land were couched in a mandatory manner, and pursuant to clause 3. 2 of the Agreement, the Appellant's Advocates were mandated to hold the deposit as stakeholders pending the execution of the Agreement for sale; receipt by the Appellant's advocate of a notice from the Appellant that the Vendor has demolished the building on the land; and that the Appellant or the Appellant's advocate releasing the completion documents to the Purchaser or Purchaser's financiers.

35. The Appellant averred that the first instalment of the deposit was released on 26th November 2020 after all the pre-conditions were met including the demolition of the building erected on the land. The Appellant also averred that the time in which the deposit was remitted to its Advocates is immaterial because the Advocate was only receiving and holding the deposit as a stakeholder and that cannot be deemed to be time in which a part payment was made to the Appellant. The Appellant further averred that the deposit was held by the Appellant's Advocate in an Escrow account and only remitted the deposit upon confirmation that all the three (3) conditions set out in the Agreement and under paragraph 52 were fulfilled.

36. According to the Appellant, when a deposit is held in an escrow account, money is not released to the seller and they cannot use that money because at that point in time, it does not belong to the seller. Therefore, the Appellant argued that it would be wrong conceptually to treat that as a time of supply for VAT purposes. Further, the Appellant relied on the professional undertaking provided by the Appellant's Advocate, where it was stated that the deposit was to be held in the interest of both the Appellant and the Purchaser and would only the released to the Appellant upon the Purchaser being satisfied that the conditions set out in the Agreement have been met.

37. The Appellant averred that had the transfer of the Land not been completed through no fault of the Purchaser, the deposit would have been returned to the Purchaser pursuant to clause 5. 3 of the Agreement which gave the purchaser discretion to terminate the agreement.

38. Additionally, the Appellant relied on clause 5. 2 of the Law Society of Kenya conditions of sale 2015 provides as follows:“The Purchase Price or any part thereof including the Deposit is to be held by the Vendor’s Advocate or auctioneer (in the case of auctions) as stakeholder and if demanded by any party in an interest earning account and the principal and Accrued Interest will be dealt with in the manner set out in the Conditions and the Agreement.”“Where the transaction does not proceed to Completion through no fault of the Purchaser the Deposit with Accrued Interest but less any applicable withholding costs charged by the bank is to be paid to the Purchaser or as per the Purchaser’s instructions.”

39. Based on the foregoing, the Appellant argued that had the pre-condition of demolishing the condemned building not been satisfied by the Appellant, the deposit would have been refunded to the Purchaser, and the parties would have been restored to the position they were in before entering into the Agreement. Consequently, the Appellant stated that the Respondent's allegations are baseless and prayed that the VAT assessment on the sale of Land be vacated.

40. Apart from the foregoing, the Appellant maintained that the Respondent erred in disallowing the Development and Approval costs on the basis that the Appellant did not prove that the costs were capitalized in its financial statements. In response to the Respondent’s statement in the Objection Decision that the Appellant failed to provide documentation showing that the Appellant capitalized the Development and Approval Costs and that the Development and Approval Costs would be allowable if the costs were capitalized, and proof provided demonstrating that the costs were not claimed in the Appellant's books as cost of doing business in the years it was incurred; the Appellant stated for the record that the Respondent never requested for this documentation at any time during the Objection Review process.

41. The Appellant averred that at all material times, having determined that the Development and Approval Costs were a capital expense, the Appellant treated the same as follows: The Appellant accumulated the Development and Approval Costs in a revaluation account relating to investment property, which is a balance sheet account.

In any given year of income, the Appellant recorded the increase in the Development and Approval Costs in the revaluation account.

The Appellant then recognized the fair value loss/ (gain) adjustments to investment property in the balance sheet of the audited financial statements.

42. Pursuant to the ITA, when computing the taxable gain or loss in any year of income, the Appellant did not subject any revaluation gains to tax and also disallowed any revaluation losses in computing its taxable income. Therefore, the Appellant maintained that it did not at any time claim the Development and Approval Costs in its income statement and it made the appropriate adjustments in its tax computations.

42. The Appellant stated the Respondent erred in subjecting the Development and Approval Costs to Corporation Tax since the Appellant never claimed the expense. Whereas the Respondent averred that the Appellant failed to demonstrate that the Development and Approval Costs were not claimed in the books of the Appellant as an expense for corporate tax purposes, the Appellant argued that the Respondent never requested for this documentation or information at any time during the Objection Review process. The Appellant reaffirmed that it has never claimed the Development and Approval Costs as expenses. The Appellant argued that at all material times, it treated the costs as capital costs and recorded the costs in the revaluation account which is a balance sheet item.

43. Further, the Appellant argued that the Respondent erred in demanding CGT and income tax on the same transition contrary to paragraph 3(1) of the Eighth Schedule to the ITA.

44. The Appellant further maintained that the Respondent erred in law and in fact by deciding on issues that it had not raised in its letter of assessment. The Appellant stated that the Respondent included its written submissions dated and filed on 28th February 2024 the for following facts in its decision which were not in the assessments: whether or not the Respondent asked for evidence as to when the deposit was placed with Appellant’s advocate; the legality of oral demolition contract; capitalization of development costs; claim of non-provision of written extension of the contract; and execution and authenticity of agreement for sale.

45. The Tribunal notes that the Appellant’s written submission are similar to its statement of facts therefore, the Tribunal will not belabour on that for two reasons, first, what is stated in the submissions has already been stated in statement of facts word by word. Second, there is a partial consent therefore, the Tribunal will focus on Appellant’s submissions that address unresolved issues during ADR.

46. The Appellant submitted they engaged in the Alternative Dispute Resolution (ADR) process with the aim of reaching an amicable resolution of the matter. This culminated in a partial ADR Agreement wherein the Respondent revised the income tax assessment amount from Kshs. 5,839,216. 00 to nil and revised the CGT assessment amount from KShs.1,902,716. 00 to nil. However, the Appellant and Respondent did not agree on the VAT Assessment relating to the sale of the Land amounting to KShs. 32,200,000. 00. Accordingly, the issue was referred back to the TAT for hearing and determination.

47. With regards to tenets of Agreement, the Appellant relied on Gerald Mutunga Mutyetumo v Festus K. Muthlani [2019] eKLR where the Court stated that: “an agreement to sell becomes a sale when the time lapses or the conditions are fulfilled." The Appellant submitted that this means that an agreement to sell represents a commitment to transfer ownership at a future time, whereas a sale completes the transfer of ownership immediately. While both are enforceable, an agreement to sell is an executory contract while a sale is an executed contract.

48. To Further emphasise the executory nature of the Agreement, the Appellant cited with approval the pronouncements of the Court of Appeal in Charles Mwirigi Miriti v Thananga Tea Growers Sacco Ltd & another [2014] eKLR wherein the Court distinguished between executory and executed contracts and stated as follows: “a contract is said to be executory so long as anything remains to be done under it by any party and executed when it has been wholly performed by all parties.” Therefore, the Appellant submitted that in an executory contract the parties’ rights and obligations remain outstanding until executed.

49. The Appellant relied on Condition 2(1)(i) of the Law Society of Kenya Conditions of Sale, 2015 (the LSK Conditions) defines completion as: “the act of finalising the sale of property, which includes the process of transferring (by registration or otherwise) interest in the property to the Purchaser." Consequently, the Appellant submitted that an agreement to sell becomes a sale upon completion when ownership is transferred by, among other things, registration.

50. The Appellant submitted that according to the Agreement, the parties intended for the sale to be finalised on the completion date when the Purchaser would be registered as the proprietor of the Land. This, according to the Appellant, meant that the time of supply was the completion date when the purchaser was registered as the proprietor of the Land. The Appellant relied on Kilifi Resorts Limited v Northern Lights Limited [2013] eKLR, the Court stated that:“the sale of the suit property was completed when the parties exchanged documents and the transfer was registered in favour of the Defendant."

51. The Appellant submitted that the parties to the agreement for sale are the only parties that could dictate what would form the subject matter of the agreement, the conditions precedent, and modalities of payment. It submitted that the parties were free to enter into an agreement for a subject matter that was to come into existence at a future date. The Appellant also submitted that the agreement for sale was for a very specific subject matter being the two parcels of bare land.

52. Finally, the Appellant submitted that prior to the demolition, the subject matter (vacant land) did not exist therefore there could not have been a sale. The Appellant submitted that by the time the subject matter of the sale (vacant land) came into existence, VAT was not chargeable since the supply of vacant land is exempt from VAT. In light of the foregoing, the Appellant submitted that the Respondent's allegations are baseless and prayed that the VAT assessment on the sale of Land be vacated.

Appellant’s Prayers 53. The Appellant made the following prayers:(a)That the transaction was a sale of vacant land which is exempt from VAT under the VAT Act;(b)That the Appellant accorded the Development and Approval Costs the correct tax treatment and therefore the assessment of corporation tax and CGT is unlawful;(c)That the objection decision dated 27th June 2023 and the demand for Kshs. 39,941,932. 00 be hereby aside; and(d)That the Tribunal be pleased to awards costs of the appeal to the Appellant.

Respondent’s Case 54. In response to the appeal, the Respondent filed its Statement of Facts dated 8th September 2023 and filed on 11th September 2023 together with its written submissions dated 12th March 2024 and filed on even date.

55. The Respondent stated that on 6th April 2023, it carried out a compliance check and raised corporation tax, VAT and capital gains tax additional assessments in relation to a sale of property located in the Nairobi Central Business District along Tom Mboya Street.

56. The Appellant lodged a late manual objection on 4th May 2023, but the Respondent allowed a late objection on 12th May 2023.

57. It is the Respondent case that it requested the Appellant to avail supporting records to support the grounds of objection but the Appellant allegedly failed to avail any records to support the objection as required under Section 51(7) of the TPA and their grounds of objection under Section 51(3) of the TPA. Consequently, the Respondent confirmed the assessments on 27th June 2023.

58. On VAT- Commercial building at the time of supply; the Respondent stated that at the point of sale of the land as depicted in the agreement for sale (Part D), there was a building on the land which was to be demolished as a precondition to the sale. Deposits were placed with the Appellant’s advocates (Bowmans) who would then transfer to the Appellant upon notifying the buyer on the execution of the demolition.

59. The Respondent stated that the deposits were transferred to the Appellant from its advocates and the balance was received from the buyer. The Appellant alleged that the evidence as to when the deposits were placed with the Appellant’s advocates were never provided.

60. The Respondent stated that the deposit as stated in the agreement amounted to Kshs. 23,000,000. 00, however the Appellant received funds in two tranches constituting of Kshs. 7,000,000. 00 and Kshs. 23,000,000. 00 transferred on 23rd November 2020 and 3rd December 2020 respectively.

61. The Respondent averred that the demolition cost was about Kshs. 7 Million and that the Kshs. 7 million paid from the advocates was the first to be received then later the deposit of Kshs. 23 Million. The Respondent added that the agreement clearly provided that a deposit of Kshs. 23 Million was to be paid. Further, the Respondent alleged that the Appellant failed to provide the contract awarded to the demolisher claiming that it was a gentleman’s agreement.

62. The Respondent stated that in line with Section 12 of the VAT Act, the Respondent consider that the time of supply is the point that the Appellant entered in the agreement for sale with the buyer as satisfactory evidence has not been provided to support the execution and authenticity of the agreement.

63. According to the Respondent, the commercial plot was sold together with the approved plans which had been procured from the NCC. The company also paid professionals to come with the plans and even paid VAT on that service. Further, the Respondent maintained that approval plans are not items that are issued within a short period of time and this must have been sought way earlier prior to the agreement for sale. The Respondent stated that it would normally take more than 6 months to get the necessary approvals from NCC. The fact that the approved plans had been obtained clearly indicates that the property being sold was a commercial property.

64. With regards to Corporation Tax and CGT in relation to the development and approval plans; the Respondent maintained that the Appellant stated that the development and approval costs incurred related to architectural design, structural and mechanical engineering services and government approvals for the erection of the new building. Based on this, the Respondent noted that the costs were of capital nature as stipulated by the conditions set out by International Accounting Standards (IAS) 16 on capitalization of capital expenses. Therefore, the same therefore should have been capitalised.

65. According to the Respondent, the capitalization should have been demonstrated with proper support to the Respondent. The Appellant did not provide satisfactory evidence or demonstration that these amounts were capitalised in their books as per the requirements of Section 51(3) of the Tax Procedures Act. Further, for income tax purposes the Respondent alleged that the Appellant failed to provide proof establishing that the expense was capitalised and therefore the corporation tax assessment was confirmed as issued.

66. For the purposes of determining the capital gains tax payable, the Respondent stated that this amount qualifies as an allowable cost if the same was capitalised and proof provided indicating that the same had not been claimed in the Appellant’s books as a cost of doing business in the years it was incurred. According to the Respondent, in the absence of supporting documents, the Respondent issued an assessment to the Appellant as provided for in Section 24 of the TPA.

67. The Respondent averred that the Appellant did not provide any evidence to show or demonstrate that the assessment was erroneous or excessive despite being given several opportunities to support its position.

68. The Respondent asserted that has competence to assess, demand and collect taxes established from the audit from Section 24(2) of the TPA which gives the Commissioner the power to assess a taxpayer's tax liability using information available to it.

69. Finally, the Respondent relied on Section 56(1) of the TPA which provides that the burden of proving that the tax assessment is wrong lies with the taxpayer and the Appellant herein failed to prove to the satisfaction of the Commissioner that the assessment was wrong.

70. The Respondent identified the following two issues for determination in its submissions:(a)Whether the Respondent misdirected itself in charging VAT on sale of a commercial building.(b)Whether the Appellant has discharged its burden of proof.

71. On whether it misdirected itself in charging VAT on sale of a commercial building, the Respondent submitted that the Appellant entered into an agreement for sale dated 9th July 2020, of a commercial property located in the Nairobi Central Business District along Tom Mboya Street. The Respondent submitted that at the point of sale of the land as depicted in the agreement for sale (Part D), there was a commercial building on the land which was to be demolished as a precondition to the sale.

72. The Respondent submitted that in the agreement for sale, a precondition was that the building was to be demolished hence a clear confirmation that the building existed at the beginning of the transaction and as such VAT was rightfully and legally charged by the Commissioner. The Respondent invited the Honourable Tribunal to examine the Appellant’s agreement for sale and note that the same was executed on 28th July 2020 and that at the time of execution, the commercial building was in existence.

73. The Respondent submitted that the sale of a commercial property by the Appellant is a taxable supply as defined under Section 2 (1) of the VAT Act. Subsection Section 1 states as follows:“taxable supply" means a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in Connection with the commencement or termination of a business.”

74. Further, the Respondent submitted that the VAT Act does not exempt charging of VAT on commercial buildings and that Part II of the First Schedule of the VAT Act relates to exempt supplies and the same provides as follows:“The supply of the following services shall be exempt supplies— Supply by way of sale, renting, leasing, hiring, letting of land or residential premises."Residential premises" means land or a building occupied or capable of being occupied as a residence, but not including hotel or holiday accommodation....”

75. The Respondent submitted that the Appeal herein relates to whether the building formed part of the land. It submitted that it is trite law that whatever is permanently attached to the soil becomes part of the soil and runs with the land; it matters not who affixed or embedded the object as captured in the Latin maxim quicquid plantatur solo, solo cedit.

76. According to the Respondent, the owner of the land becomes the owner of the soil and all objects permanently affixed or embedded thereto. In a conveyance or sale transaction, all objects affixed and embedded to the land at the time of the contract of sale must be left for the purchaser unless otherwise agreed.

77. In addition, the Respondent submitted that in law, a sale agreement is effective to pass objects permanently affixed to the soil without express mention and that is why there is never a separate title for the land and another for the building. The Respondent thus submitted that a taxable value in a commercial building to include land and other fees paid during the transaction is not contrary to the VAT Act and it is actually supported by Land Law Principles.

78. The Respondent cited TAT 14 Of 2017 National Bank Kenya Ltd vs Commissioner of Domestic Taxes where this Tribunal found that the Respondent was justified in charging VAT on sale of commercial property. The Tribunal held as follows:“A reading of Paragraph 8 above indicates that what is exclude is land and residential premises. The definition of residential premises includes land. Thus, the exclusion of commercial premises from Paragraph 8 indicates that Parliament's intent was to bring to tax commercial premises. If it were not Parliament’s intention then it would have, as it did for residential premises, included them in the list of exempt items.”

79. The Respondent also relied on TAT E377 of 2022- Development Bank of Kenya Vs Commissioner of Legal Services & Board Coordination where the Tribunal held that the Respondent was justified in charging VAT on sale of commercial property. The Tribunal took note of the fact that it had dealt with a similar matter being TAT 14 of 2017 National Bank of Kenya vs. Commissioner Domestic Taxes.

80. The submitted that the Appellant did not at any point disputed the fact that the building sitting on the parcel of land was in fact a commercial building and as such, this is an admission that the building was commercial in nature and the Commissioner was right to charge VAT on the sale of the same.

81. The Respondent further submitted that the deposits of the sale of land amounting to Kshs. 230,000,000. 00 were placed with the Appellant’s advocates (Bowmans) who would then transfer to the Appellant upon notifying the buyer on the execution of the demolition. The Respondent submitted that the deposits were transferred to the Appellant from their advocates and the balance was received from the buyer. The Respondent submitted that the evidence as to when the deposits were placed with the Appellant’s advocates were never provided. The Respondent also submitted that the Appellant did not provide a contract with the demolisher was not provided.

82. The Respondent cited the case of Prima Rosa Flowers Limited v Commissioner of Domestic Taxes [2019] eKLR, Ushindi Exporters Limited vs Commissioner of Investigation and Enforcement (Tax Appeals Tribunal No 7 of 2015), and Commissioner of Domestic Taxes V Metoxide Limited [2021] to submit that the taxpayer has a burden of proof and must prove that the Respondent’s decision is wrong. The Respondent submitted that the Appellant failed to discharge the burden.

Respondent’s Prayers 83. The Respondent prayed that the Tribunal be pleased to find as follows:(a)The Respondent's objection decision dated 27th June 2023 as proper and in conformity with the provisions of the Law; and(b)The appeal is devoid of merit and ought to be dismissed with costs to the Respondent.

Issues For Determination 84. The Tribunal having considered the parties’ pleadings, documentation, written submissions and the Partial Consent filed on 22nd December 2023, puts forth the following single issue for determination:Whether the Respondent erred in assessing VAT relating to the sale of the Property.

Analysis And Findings Whether the Respondent erred in assessing VAT relating to the sale of the Property. 85. The Tribunal notes the Appellant’s argument that the Respondent erred in fact and in law in demanding VAT on transfer of undeveloped land contrary to the provisions of Paragraph 8 Part Il of the First Schedule of the VAT Act. The Appellant also submitted that at the time of sale, the Building had been demolished in order for the Appellant to meet the conditions of the Agreement for Sale.

86. The Tribunal also notes the Respondent’s submission that in line with Section 12 of the VAT Act, it considered that the time of supply was the point that the Appellant entered into the Agreement for Sale with the buyer. The Respondent submitted that the Appellant did not adduce satisfactory evidence to it to support the claim that the Building had been demolished prior to the sale. The Respondent doubted the authenticity of the Agreement which had bene adduced as evidence. The Tribunal further notes the Respondent’s submission that the building formed part of the land and that it is trite law that whatever is permanently attached to the soil becomes part of the soil and runs with the land; it matters not who affixed or embedded the object as captured in the maxim ‘quicquid plantatur solo, solo cedit’.

87. In view of the foregoing the Tribunal observes that from the respective pleadings and submissions both parties agree that VAT is chargeable on the sale of developed land. The Tribunal notes that the Appellant’s point of departure in this regard, is that the Building was demolished and therefore the land was undeveloped. The Appellant adduced the Agreement for Sale dated 9th July, 2020 to buttress its position.

88. The Tribunal’s view is that where there is a sale of land, it matters not whether the land is developed. Land is defined in Article 260 of the Constitution of Kenya, 2010 as follows:“Land includes-(a)The surface of the earth and the sub-surface rock; ………………………………………………………………(e)The airspace above the surface….”

89. In Cape Brandy Syndicate vs. I.R Commissioner (1921) IKB the judge expressed the common law position on interpretation of a taxing statute by holding as follows:…”in a taxing Act one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used”.

90. The Tribunal notes the following provisions of Section 2(1) of the VAT Act which defines “taxable supply":“a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business.”

90. The Tribunal in abiding by the rules set out in Cape Brandy Syndicate vs. I.R Commissioner (1921) IKB notes that Part II of the First Schedule to the VAT Act deals with exempt supplies and Paragraph 8 of the said Schedule provides as follows:“Supply by way of sale, renting, leasing, hiring, letting of land or residential premises.’ [emphasis ours].”Pursuant to paragraph 8, Part II of the First Schedule to the VAT Act, “the letting of land or residential premises” is exempt from VAT.

91. The Tribunal notes that in interpreting the above paragraph, the use of the comma cannot be ignored. The use of the comma, creates breakages in the paragraph and therefore the clause “letting of land or residential premises” is a separate clause from the others. Accordingly, “letting of land or residential premises” can only be looked as a separate clause on its own. The use of the conjunction “or” in the said clause, indicates that the letting of commercial premises are excluded from the exemption. Paragraph 8 can also be re-stated as follows: “Supply by way of letting of land or residential premises”; the view of the Tribunal is that in such a case, if a taxpayer ‘lets’ commercial premises, the same would be vatable.

92. The Tribunal is of the view that the omission of the term “commercial premises” is only to the extent that the supply is in respect of letting of commercial premises. The finding of the Tribunal at this point is that it is the sale of commercial premises that is exempt from VAT and not the supply by way of letting of commercial premises. The Tribunal cites the holding of the High Court in David Mwangi Ndegwa vs. KRA Civil Suit No. 541 of 2015 where the court made a declaratory order that “Value Added Tax is not payable on a transaction for the purchase or sale of land whether or not the buildings thereon are residential or commercial buildings”. This declaratory order still stands.

93. Under the circumstances, the Tribunal finds that the Respondent erred in assessing VAT relating to the sale of the Property.

Final Determination 94. The upshot to the foregoing is that the appeal is meritorious. Consequently, the Tribunal makes the following Orders:a.The Appeal is hereby allowed.b.The Respondent’s objection decision dated 27th June, 2023 is hereby set aside.c.Each party to bear its own cost.

95. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 19TH DAY OF JULY, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K. NGALA - MEMBERGEORGE KASHINDI - MEMBEROLOLCHIKE S. SPENCER - MEMBER