[2023] KETAT 114 (KLR)

Shah & 2 others v Commissioner of Domestic Taxes (Tribunal Appeal 587 of 2021) [2023] KETAT 114 (KLR) (Civ) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 114 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tribunal Appeal 587 of 2021

E.N Wafula, Chair, RM Mutuma, RO Oluoch, D.K Ngala & EK Cheluget, Members

March 17, 2023

Between

Elizabeth Rita Shah

1st Appellant

Tula Ravindaranath Bowry

2nd Appellant

Darshark Shantilal K. Shah

3rd Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellants are siblings and beneficiaries of two parcels of land, namely LR/1871/11/404 and LR/1871/11/406 measuring 0. 2313 and 0. 1095 hectares respectively, which they inherited from their deceased father in the year 2015.

2. The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Part 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The Appellants herein stated that they acquired the properties, LR /1871/11/404 and LR/1871/11/406 through a transfer on September 30, 2015 upon the confirmation of a grant of probate wherein the beneficiaries were the applicants on July 29, 2015.

4. The Appellants in the year 2020 sold the subject properties to Risun Development Company for Kshs 305, 584,000. 00 made up as Kshs 207,400,000. 00 for LR /1871/11/404 and Kshs 98,184,000. 00 for LR/1871/11/406, and the property attracted Capital Gains Tax (CGT) in line with the provisions of Paragraph 2 of the Eighth Schedule of the Income Tax Act.

5. The appellants further stated that for purposes of determining the value of the property for purposes of determining the CG, the value of the aforesaid properties was arrived at based on the valuation of report of an independent valuer, Knight Frank in 2015 which determined the market value to be; LR/1871/11/406 at Kshs 125,184,600. 00 and LR/1871/11/406 at Kshs 264,435,000. 00 totaling Kshs 389,619,600. 00

6. The Appellant further stated that based on various adjusted costs encountered a loss of Kshs 99,485,087. 00 and as a result of the incurred loss, there was no chargeable gain, and therefore the self-assessment was strictly done in compliance with the stipulated tax laws.

7. The Respondent after reviewing the documents provided by the Appellants through their tax consultant, issued an assessment notice relating to the CGT based on the sale of the property to Risun Development Company, amounting to Kshs 27,728,475. 00 and the entire assessment was issued to the 1st Appellant.

8. The Appellants through their tax agent RSM(EA) Ltd objected to the entire assessment on May 27, 2021.

9. The Respondent reviewed the assessment and on June 13, 2021 issued its objection decision through which it vacated the assessment of a sum of Kshs 13,221,750. 00 and confirmed the assessment of the sum of Kshs 14,406,725. 00

10. The Appellant being dissatisfied with the Respondent’s objection decision dated June 13, 2021 lodged the Appeal herein with the Tribunal on September 24, 2021.

The Appeal 11. The appellant in its memorandum of appeal filed on September 24, 2021 has set out the following grounds of appeal :-i.That by purporting to confirm the assessment against the first appellant, the respondent erred in law and in fact by misinterpreting the provisions of the Income Tax Act (cap 470) and all other relevant laws governing the taxation of transactions involving successive transmissions of property upon the death of the original proprietor thereof, culminating in a transfer of the same to a third party.ii.The respondent fell in error by misapprehending the juridical nature of the transactions which resulted in the eventual transfer of the property to a third party, thereby making an incorrect calculation of purported unpaid capital gains tax.iii.The respondent erred in law and in fact to appreciate the interplay between the various provisions of laws governing transmission and/or transfer of, property upon the death of a deceased proprietor, and the laws governing taxation of such transactions, which misapprehensions led them to an erroneous capital gains tax assessment.iv.That the Respondent erred in law and in fact in failing to appreciate that where ( as is the case herein) there are successive transmissions of a property upon the death of its original proprietor, as well as the legatee to whom it devolved upon the death of the original proprietor , culminating to the transfer of the said property to a third party (by whoever acquired it from the original legatee) , the computation of the capital gains tax on the transfer to a third party ought to be done without any considerations drawn from the initial successive transmissions, which transactions are legally separate and independent of the transaction pursuant to which the property was transferred to a third party.v.The Respondent erred in law and fact in failing to appreciate that the appellants did not violate any tax laws and in fact strictly complied with all relevant laws in their computation of the capital gains tax.vi.The Respondent erred in fact and in law by purporting to confirm- the assessment of the CGT only as against the first appellant, and in the process purported to illegally, unprocedurally and unconstitutionally impose a tax on the first Appellant.vii.The Respondent erred in law and in fact by failing to apportion any CGT that he erroneously and illegally considered to be due and payable, upon all the Appellants.viii.The Respondent erred in law and in fact in failing to appreciate that tax legislation must be strictly construed.ix.The Respondent erred in law and fact by failing to appreciate that any ambiguity in tax legislation operates in favour of a tax payer.x.The Respondent by purporting to confirm the assessment as against the First Appellant as aforesaid, the Respondent acted ultra vires his powers and in excess of his jurisdiction as in law provided.xi.The Respondent by purporting to confirm the assessment as against the First Appellant, acted in violation of the First Appellant’s rights under Articles 27, 28, 40, 47, 48, and 50 of the Constitution of Kenya, 2010, as read together with the provisions of the Fair Administrative Actions Act.xii.The respondent by purporting to confirm the assessment as against the first appellant aforesaid, acted in violation of the doctrine of legitimate expectation.

12. Wherefore by reason of the grounds aforesaid, the appellant prayed that the honourable tribunal allows the appeal sets aside the confirmed assessment and awards costs to the appellant.

The appellant’s case 13. The appellant has grounded its appeal on its statement of facts filed on September 24, 2021 and the written submissions dated November 1, 2022 and filed on November 16, 2022.

14. The Appellants stated that they acquired the properties known as LR No. 1871/11/406 and LR No. 1871/11. 404 through a transfer on September 30, 2015 upon the confirmation of a grant of probate wherein the Appellants were the applicants / beneficiaries on July 29, 2015.

15. The Appellants stated that at that point in time, a gain had crystalized as per the definition of a gain under Paragraph 4 of the Eighth Schedule for the reason that the transfer value of the property exceeded the adjusted cost of the property. The gain of Kshs 388,625,850. 00 was exempted from capital gains tax by dint of paragraph 36(f) of the first schedule of the Income Tax Act, that exempts the gains derived from the transfer of suit properties for purposes of administering the estate of a deceased.

16. It was averred that the subject properties were subsequently sold and transferred in the year 2020 to an independent third party, Risun Development Company Ltd, for a total of Kshs 305,584,000 (Kshs 207,400,000 for LR 1871/11/404 and Kshs 98,184,000 for LR 1871/11/406).

17. The transaction thereby attracted capital gains tax calculated as per the provisions of paragraph 2 of the eighth schedule to the ITA.

18. The appellant submitted that the sale of the subject properties was made independent from the initial successive transactions and it was therefore essential to determine the transfer value of the property so as to assess the gains thereon.

19. The appellant submitted that the adjusted cost is determined using section 9(1)1 of the eighth schedule which was applicable on the first transfer; where the amount for which the transfer of the property from the deceased ‘s estate is deemed to be equal to the market value of the property at the time of the transfer which becomes the adjusted cost for the appellants. Further, for purposes of determining the cost of the property for calculation of CGT the value of the aforesaid properties was arrived at based on the valuation report of an independent valuer, Knight Frank in 2015, which determined the market value of LR No.1871/11/404 at Kshs 264,435,000. 00 and LR No. 1871/11/406 at Kshs 125, 184, 600. 00 totaling to Kshs 389,619,600. 00 for the two properties.

20. The appellants further submitted that paragraph 4 of the aforesaid schedule stipulates that where there is a gain it is determined from the amount which the transfer value of the property exceeds the cost of the property. The appellants averred that the amount in excess was a loss of Kshs 389, 619,600. 00 which was realized on the transfer.

21. The appellants averred that the adjusted costs are not actual costs but are specifically defined in paragraph 8 of the schedule as the amount of or value of the consideration for the acquisition or construction of the property for the purpose of enhancing or preservation of the value of the property at the time of transfer ; the amount of expenditure wholly and inclusively incurred at the time of acquisition of a property by the transferor establishing preserving or defending the title to , or a right over the property and incidental costs on the transferor acquiring the property.

22. The appellants averred that based on the various adjusted costs, the appellants encountered a loss of Kshs 99,485. 00, as shown in the table below;Plot No. Transfer Value Adjusted Cost ofacquisition Loss

LR No. 187/11/404 196,914,425 (264,435,000) (67,520,574)

LR No. 187/11/406 93,220,087 (125,184,600) (31,964,513)

Total 290,134,513 (389,619,600) (99,485,087)

There was a loss of Kshs. 99,485,087 on the transfer of Plots 404 and 406

23. The Appellants averred that as a result of the loss incurred by the Appellants, there was no chargeable gain and therefore the self-assessment, was strictly done in accordance with the stipulated tax laws, which ought to be strictly interpreted.

24. The Appellant submitted that failure to take account of the valuation of the properties in 2015 is tantamount to inferring that they were of no value which is unreasonable and illogical.

25. The Appellants submitted that the Respondent erred in confirming the assessment of CGT on the First Appellant as an individual, instead of apportioning the CGT payable on all Appellants based on the ratio; Rita Shah (40%), Darshak Shah (30%) and Tula Bowry (30%) respectively.

26. The Appellants submitted that the Respondent erred in law and fact in failing to appreciate the interplay between the various provisions of laws governing transmission and or transfer of property upon the death of a proprietor and the laws governing taxation of such transactions, which led them to making an erroneous Capital Gains Tax.

27. By reason of the foregoing, the Appellants prayed for the Tribunal to allow the Appeal and set aside the Respondent’s confirmed assessment with costs to the Appellant.

The Respondent’s Case 28. The Respondent has set out its response to the Appellant ‘s case on the Statement of Facts filed on October 27, 2021 and the written submissions dated October 30, 2022 and filed on the November 2, 2022.

29. The Respondent stated that they sent the Appellants a notice of intention to issue an assessment on February 19, 2021.

30. The Respondent after reviewing the documents provided by the Appellants issued an assessment notice relating to CGT on the sale of LR No. 1871/11/404 and LR No. 1871/11/ 406 to Risun Development Company Ltd amounting to a principal amount of Kshs 14,506,725. 00 which assessment was issued to the 1st Appellant as summarized herebelow;1870/11/404 1870/11/406

A. Sales Proceeds (year 2020) 207,400,000 98,184,000

Less Incidental costs

Purchase Price (year 2015) Disallowed Disallowed

Legal fees 5,185,000 2,454,600

Commission on sale - Owaga 3,733,200 1,767,312

Professional fees 84,204 39,863

Commission on sale- Mitul 1,451,800 687,288

Land survey 31,369 14,850

B. Total Incidental costs 10,485,573 4,963,913

Net Gain ( A-B) 196, 914, 427 93,220, 087

CGT Payable (5%) 9,845,721 4,661,004

31. That the Appellants upon being issued with the assessment objected to the entire assessment on May 27, 2021.

32. The Respondent stated that it reviewed the assessment and on June 13, 2021 issued its objection decision through which it confirmed the assessment of Kshs 14,506,725. 00 and vacated the amount of Kshs 13,221,750. 00

33. The Respondent submitted that Section 24 of the TPA allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent but the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information.

34. The Respondent averred that in the year 2020, the Appellants sold the subject properties to Risun Development Company for Kshs 305,584,000. 00 ie. Kshs 207,400,000. 00 for LR No. 1871/11/404. and Kshs 98,184,000. 00 for LR No. 1871/11/406.

35. The Respondent further averred that at the point of inheritance, an independent valuer, Knight Frank valued the two parcels of land at Kshs 389, 619, 600.

36. The respondent stated that the CGT computation by the Appellants was based on the difference between the cost as stated in the valuation report at the time of inheritance, and the sales proceeds received upon the disposal of the properties in the year 2020.

37. The Respondent further stated that the loss declaration in the Appellants computation revealed that the Appellants had used the market value of Kshs 389,619,600. 00 at the time it was transferred from their father to themselvesas the cost of acquisition. However, no CGT was paid at the time the Appellants inherited the property from their father in the year 2015 as the transfer was exempt under Paragraph 36(f) of the First Schedule of the Income Tax Act.

38. It was also the Respondent ‘s averment that there was no CGT paid at the time of the transfer to the third-party independent buyer, Risun Development Company Ltd in the year 2020. The Respondent as a result issued additional assessments based on the premise that the costs the Appellants deducted in their computation for CGT were not costs that were realized or spent by them apart from the incidental costs borne.

39. The Respondent stated that it issued Notices of Intention to assess to the Appellants on April 8, 2021 and the resultant assessments were done on April 27, 2021, as follows :--- KRA202107203296 – Kshs 4,661,005-- KRA202107211760 -- Kshs 9,845,720-- KRA202107200034 – Kshs 13,221,750

40. The Respondent averred that the Appellants were accorded fair treatment within the meaning of the Fair Administrative Action Act whereby the objected amount of Kshs 13,221,750. 00 which was proved was allowed, and the amount of Kshs 14,406,725 which was not supported was confirmed as assessed.

41. The Respondent submitted that pursuant to Section 56 of the TPA, it’s the obligation of the taxpayer to prove that the decision of the Respondent is incorrect and that the Appellant failed to discharge this burden. The Respondent also submitted that under Section 107 of the Evidence Act (Cap 80 of the Laws of Kenya) its trite law that he who alleges must prove.

42. By reason of the aforesaid, the Respondent submits that the objection decision dated August 13, 2021 is proper and the Appellants Appeal ought to be dismissed with costs.

Issues for determination 43. The Tribunal having carefully considered the pleadings and submissions by the parties is of the view that the Appeal herein distils into two issues for determination, namely;-i.Whether the adjustment costs applied by the Appellants to determine the CGT Payable are allowable?ii.Whether the Respondent was justified in confirming the objected assessment?

Analysis and determinationi.Whether the adjusted costs applied by the Appellant to determine the CGT payable are allowable?

44. A review of the pleadings and submissions made by the parties herein makes it apparent that it is undisputed the Appellants were bequeathed two properties by their deceased father, to wit LR 1870/11/404 and LR 1870/11/406, which they disposed off by way of transfer to Risun Development Company Ltd on December 29, 2020. Consequently, the Appellants filed a self-assessment indicating a loss on the above sale.

45. The Respondent on noting the filing, requested the Appellants to amend their CGT returns, failing which the cost of the purchase price would be rejected and assessments issued. The underlaying issue in dispute herein is therefore the allowable adjustment cost in determining the CGT payable by the Appellants.

46. In analyzing the facts and the applicable legal provisions herein, suffice it to say that Capital Gains Tax, just as any other emergent taxes, may not well be understood in this jurisdiction in the real estate sector and is prone to leaving the taxpayers, more so property developers and dealers in real estate sector perplexed. Nonetheless, Capital Gains Tax is chargeable on gains or profits made on the transfer of land, buildings or market securities. The tax is payable by the transferor, or the person selling/transferring.

47. Where property is involved, the tax is calculated from the gain between the cost of acquiring the property and the cost of selling it, considering any input costs such as value enhancement and professional fees.

48. The Respondent has stated that its review of the records provided and i-Tax CGT returns for the Appellants, revealed that: -a.The transfer of the properties in 2015 from the estate of the deceased father to his children was exempted from CGT tax by the provisions of Paragraph 36(f) of the First Schedule to the ITA.b.The Appellants acquired the parcels of land as an inheritance and did not pay any consideration for the said properties.c.The Appellants used the market value of Kshs 389,619,600. 00 determined by Knight Frank (an independent valuer), of the property at the time of inheritance, as the cost of acquisition.d.As such the Appellant did not incur the purchase cost of Kshs 389,619,600. 00 on LR 1871/11/404 and LR 1871/11/406 which was subsequently applied in the determination of the CGT payable.e.The transfer of the property in the year 2020 is between the legatees (Appellants) and a third party (Risun Development Company Ltd ) in respect of the two properties.

49. The Respondent has submitted that according to the ITA, the costs allowable for deduction in arriving at the taxable income for CGT are the actual costs. It stated that the adjusted costs of property for determination of CGT in accordance with the provisions of Paragraph 8 and Paragraph 10 of the Eighth Schedule of the ITAare in actual sense costs that have been realized by the transfer of the property.

50. The Respondent averred that the acquisition cost of these properties from Mr. Shantilall Keshavji Shah (Deceased) of Kshs 389,619,600 to Tula Ravindaranath Bowry, Elizabeth Rita Shah and Darshak Shantilall Keshavji Shah are not costs that are realized or spent by the beneficiaries, apart from incidental costs borne by the three siblings.

51. The Respondent therefore submitted that the self-assessed loss on the sale of the two properties by the Appellants was inaccurate.

52. The Respondent conceded that its assessment of the Appellants of the additional sum of Kshs 13,221,750. 00 was made in error thus the Respondent vacated the said assessment as against the Appellant.

53. The provisions relating to the contested issue of adjustment of costs for purposes of determining the CGT payable can be found in the Eighth Schedule of the ITA. The adjusted cost is defined under Paragraph 8 of the Schedule. The Respondent has justified its adjustment and assessment pursuant to Paragraphs 8 and 10 of the Eighth Schedule of the ITA, the pertinent issue in dispute being the basis of the adjustment of the costs.

54. However, the Tribunal takes note that Paragraph 9 of the Eighth Schedule, has also made a proviso in the adjustment of costs relating to property which is acquired or transferred otherwise by way of a bargain made at arm’s length, by way of a gift in whole or in part, for a consideration that cannot be valued or as a result of a transaction between persons who are related. Then for purposes of Paragraph 8 (adjustment costs) the amount of the consideration for purposes of acquisition of the property shall be deemed to be equal to the market value of the property at the time of the acquisition, or to the amount of the consideration used to compute stamp duty payable on the transfer by which the property was acquired, whichever is the lesser.

55. In view of the foregoing, Paragraphs 8 and 10 of the Eighth Schedule cannot be applied in isolation of the Paragraph 9, where its applicable, as this is a proviso in the specified circumstances.

56. In the Tribunal ‘s considered view , pursuant to Paragraphs 8,9 and 10 of the Eighth Schedule of the ITA, the adjusted cost of property which is acquired or transferred by way of a gift in whole or in part , or as a result of a transaction between persons who are related , then for the purposes of Paragraph 8 ,the amount of the consideration for the acquisition of the property shall be deemed to be equal to the market value of the property at the time of its acquisition , or to the amount of consideration used in computing stamp duty payable on the transfer by which the property was acquired , whichever is the lesser.

57. In view of the foregoing conclusion , the Tribunal therefore finds that the Respondent’s contention that since the Appellants acquired the subject properties as an inheritance and did not pay any valuable consideration for the acquisition of the same , then the properties had no value at acquisition by the Appellants which could be applied as the basis of adjusting the costs for purposes of CGT, erroneous and a misapprehension of the relevant legal provisions, which was tantamount to the Respondent declaring the subject properties as “ valueless” to borrow the words of the Appellants.

58. In a nutshell therefore, the effect of Paragraph 9 of the Eighth Schedule connotes in essence that Capital Gains Tax on inherited property disposed off by the legatees ought to treat the cost basis of inherited property differently from other ordinarily commercially acquired assets , when an inherited property is sold , as the provision clearly sets cost basis as the fair market value at the time of the owners’ death ( time of transmission or acquisition by the legatees) , or the consideration applied to determine the stamp duty payable as the basis of the value for purposes of adjusting costs , for determination of CGT.

59. The Appellants herein acquired the properties known as LR 1871/11/404 and LR 1871/11/406 through a transfer on 30th September, 2015, upon the confirmation of a grant of probate, as legatees of the deceased owner, who was their father. The transfer therefore falls within the four corners of Paragraph 9 of the Eighth Schedule, as a property acquired and transferred by way of a gift, and between persons who are related. The cost basis for purposes of adjusting costs for determining CGT is therefore the fair market value as at the date of transfer, or the consideration applied to determine stamp duty for the transaction whichever is the lesser, as provided for in the aforesaid paragraph.

60. The two parties are in agreement that as at the time of transmission or transfer of the properties to the Appellants as legatees of the owner’s estate in the year 2015, a valuation was undertaken by a professional valuers Frank Knight Ltd, which determined the fair market value to be the sum of Kshs 389, 619, 600 ( Kshs 264,435,000. 00 for LR 1871/11/404 , and Kshs 125,184,600. 00 for LR 1871/11/406).

61. In the Tribunal ‘s considered view therefore, having regard to Paragraph 9 of the Eighth Schedule to the Act, this valuation as presented by Knight Frank Ltd professional valuers represents the fair market value at the time of the acquisition of the subject properties by the Appellants as legatees. That being the case then, the Appellants were entitled and justified to apply the abovesaid value as the cost basis for the adjustment of costs for purposes of determination of the Capital Gains Tax payable.

62. Consequently, the Tribunal therefore finds that the Appellants correctly applied the fair market value of the Properties as at the time of the acquisition by the legatees as the cost basis of applying the adjustment of costs for the determination of the CGT payable in the transfer between the Appellants and the independent third party purchaser for value, Risun Development Company Ltd.

63. The upshot of the foregoing is that the Tribunal finds that the Respondent was erroneous in disallowing the Appellants’ acquisition costs in the adjustment of costs for determination of CGT and fell in error in confirming the additional assessment against the Appellants thereby issuing an erroneous objection decision against the Appellants.ii.Whether the Respondent was justified in making the objected assessment?

64. The Tribunal having found that the Respondent was in error when it disallowed the Appellants’ cost basis for adjustment, and wrongly issued an erroneous CGT assessment, the finding conclusively determines the second issue and renders the same moot.

65. In the light of the foregoing, the Tribunal finds the Appeal meritorious, and the same hereby succeeds.

Final decision 66. The upshot of the foregoing analysis is that the appeal succeeds and the tribunal accordingly proceeds to make the following orders;a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated August 13, 2021 be and is hereby set aside.c.Each party to bear its own costs.

67. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH 2023. ERIC N. WAFULA CHAIRMAN………………………………. ………………………………ROBERT M. MUTUMA RODNEY O. OLUOCH MEMBER MEMBER……………….………… ………………………….DELILAH K. NGALA EDWIN K. CHELUGET MEMBER MEMBER