[2024] KETAT 1607 (KLR)

Vaghji v Commissioner of Domestic Taxes (Tax Appeal E331 of 2024) [2024] KETAT 1607 (KLR) (25 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1607 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E331 of 2024

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & G Ogaga, Members

October 25, 2024

Between

Amratlal Poptlal Vaghji

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is an individual and a registered taxpayer.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for collecting and receiving all tax revenue. Further, under Section 5(2) of the Act, concerning 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 Parts 1 & 2 of the First Schedule to the Act to assess, collect and account for all revenues under those laws.

3. The Appellant purchased a piece of land and registered at Lands Ministry on 15th June 2016. The Appellant subsequently sold the land to Steelstone Kenya Ltd on 24th September 2020.

4. The Respondent raised assessments on the Appellant in relations to the sale of the property to Steelstone Kenya Limited vide a letter dated 29th November 2023.

5. The Appellant objected through a letter dated 15th December 2023. The parties further engaged through correspondences by emails.

6. Subsequently the Respondent issued its objection decision on 13th February 2024.

7. The appellant being dissatisfied with the decision by the Respondent, filed a Notice of Appeal at the Tribunal dated 7th March 2024.

The Appeal 8. The Appellant’s Memorandum of Appeal filed on the 20th March 2024 was based on the following grounds:a.That the Respondent erred in fact and in law in disallowing part of the acquisition cost; that is the legal fees and the stamp duty incurred at the time the taxpayer purchased the property.b.That the Respondent erred in law in demanding VAT on transfer of the property in contravention of Section 34(2) of the VAT Act.c.That the Respondent erred in demanding WHT from the taxpayer and that the effect of the Respondent's demand is to subject a fee to income tax twice.d.That the Respondent's conduct is unfair and infringes on the taxpayer's rights and freedoms under the Constitution.

Appellant's Case 9. The Appellant’s case is premised on the hereunder filed documents:i.The Appellant’s Statement of Facts dated 20th March 2024 together with the documents attached thereto.ii.The Appellant’s written submissions dated 8th July 2024 and filed on 9th July 2024.

10. The Appellant stated that the Respondent's decision and this tax dispute arose from the transfer of land (LR. 12775) by the Appellant to Steelstone Kenya Limited which occurred in 2020.

11. That the Appellant had acquired the aforesaid property in 2016 by way of transfer from a Partnership (Amratlal and Mukhtiar Properties) to himself for Ksh 125,830,000. 00. That this transfer was registered against the property's title by the registrar on 15th June 2016.

12. The Appellant submitted that in 2020, it received an offer from Steelstone Kenya Limited who offered to purchase the property for the sum of Ksh 175,000,000. 00. That after parties reached a consensus, they entered into a sale agreement dated 24th September 2020, in which the Appellant agreed to sell the property.

13. That in compliance with his tax obligations as set out in Section 3(2)(f) as read together with the Eighth Schedule of the Income Tax Act ("ITA”), the Appellant computed his tax liability (Capital Gains Tax (CGT)) amounting to Kshs 2,115,460. 00 and paid the said CGT to the Respondent

14. The Appellant averred that the CGT liability of Ksh 2,115,460. 00 was computed as tabulated below:Description Amount (Kshs)

Selling price 175,000,000

Less: Legal fees on sale (1,527,450)

Transfer value 173,472,450

Purchase price (2016) (125,830,000)

Stamp duty on purchase (5,033,240)

Legal Fees (300,000)

Adjusted cost (131,163,240)

Capital Gain 42,309,210

CGT rate applicable 5%

CGT paid 2,115,460

15. That the Appellant was surprised when he received the assessment dated 29th November 2023 in which the Respondent demanded additional taxes of Ksh 39,369,830. 00 (inclusive of penalties and interest).

16. That in the said assessment, the Respondent:i.Disallowed part of the adjusted cost and demanded additional CGT of Kshs 4,909,049. 00;ii.Demanded for Value Added Tax ("VAT”) on transfer of the property amounting to Kshs 34,300,000. 00; andiii.Demanded withholding tax ("WHT") on the legal fees paid on the transfer of the property.

17. That the Appellant then lodged his notice of objection on 15th December 2023, in which he objected to the assessment in its entirety.

18. That the Respondent issued its objection decision on 13th February 2024, in which the Respondent confirmed a tax assessment of Ksh 39,369,830. 00 (inclusive of penalties and interest) as tabulated below:-Tax head Principal Penalty Interest Total

Capital Gains Tax 3,636,333 1,272,716 4,909,049

VAT 24,500,000 1,225,000 8,575,000 34,300,000

WHIT 65,625 6,563 88,594 160,782

Total confirmedassessment 28,201,958 1,231,563 9,936,310 39,369,830

19. The Appellant further expounded on each of its grounds of appeal as hereunder;Ground 1: The Respondent erred in fact and in law in disallowing part of the acquisition cost, i.e. the legal fees and the stamp duty incurred at the time the taxpayer purchased the property

20. The Appellant stated that in arriving at its CGT tax demand, the Respondent disallowed part of the acquisition cost, the legal fees and the stamp duty incurred at the time the taxpayer purchased the property.

21. That the Respondent's computations, as compared with those of the Appellant were as tabulated below:-Description Appellant's CGTcomputationAmount(Kshs) Respondent's CGT assessment ComputationAmount (Kshs)

Selling price 175,000,000 175,000,000

Less: Legal fees on sale (1,527,450) (1,527,450)

Transfer value 173,472,450 173,472,450

Purchase price (2016) (125,830,000) (58,136,578)

Stamp duty on purchase (5,033,240) -

Legal Fees (300,000) (300,000)

Adjusted cost (131,163,240) (58,136,578)

Capital Gain 42,309,210 115,035,872

CGT rate applicable 5% 5%

CGT paid by taxpayer/payable by 2,115,460 5,751,794

22. It was the Appellant’s contention that from the foregoing tabulation, it was evident that the points of departure between the Appellant and the Respondent's computation is that the Respondent disallowed the following adjusted costs:i.Part of the acquisition cost; andii.The stamp duty incurred at the time of purchase.

23. The Appellant averred that the Respondent's actions had no legal basis and further expounded as follows:a.The acquisition cost of Ksh 125,830,000

24. That the Respondent disallowed a part of the acquisition cost. It averred that in the Appellant's computation, the Appellant had claimed the acquisition cost of Ksh 125,830,000. 00 while in the Respondent's computation, it used an acquisition cost of Ksh 58,136,578. 00.

25. That it was an uncontroverted fact that the Appellant acquired the property from the Partnership at a cost of Ksh 125,830,000. 00. That this was clear from the transfer dated 10th June 2016 and registered at the lands registry on 15th June 2016. That this fact was further buttressed by the registration on the title which indicates the transfer amount as Ksh 125,830,000. 00. The Appellant referred the Tribunal to the copy of the title. That the specific entry on the title was entry 6 made on 15th June 2016.

26. That the Respondent did not provide the Appellant with a factual or legal basis for the purported adjustment of the acquisition cost, either in the notice of assessment or objection decision. The Appellant reiterated that this issue was pointed out in the Appellant's notice of objection and the Respondent still did not provide a basis for the disallowance in the objection decision.

27. The Appellant stated that in the objection decision dated 13th February 2024, the Respondent averred in its statement of findings that it requested for the following documents:a.The valuation report for the sale of the property at Kshs 175,000,000. 00; andb.Evidence of stamp duty paid to KRA.

28. That it was important for the Tribunal to note that the valuation report requested for by the Respondent was in relation to the sale of the property by the Appellant to Steelstone Limited (this was the transaction for Kshs 175,000,000. 00), while the issue in dispute is the acquisition cost of the Property by the Appellant from the Partnership (acquisition cost of Ksh 125,830,000. 00). That the valuation report on sale (if any) was irrelevant to the cost that the Appellant acquired the property.

29. That in any event, the sale price of property is a contractual term agreed on between the parties and there is no legal requirement for a vendor to conduct a valuation, in a sale that is purely contractual. That it was therefore unavailable for the Respondent to argue that it confirmed the assessment on a lack of a valuation report on the sale of property, which valuation report is irrelevant to the issue in dispute.

30. The Appellant averred that while the Respondent was clothed with powers to request for information under Section 59 of the Tax Procedures Act, it must only request for relevant information. The Appellant relied on the decision by Justice Majanja in HCITA No. 121 of 2021: Commissioner of Domestic Taxes vs. Metoxide Africa Ltd where Justice Majanja stated as follows:-“The Commissioner is entitled to ask such questions and call for such documents that would enable it correctly assess the liability of a taxpayer.From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined 'competence' and 'relevance' because it is only evidence that meets these two tests that demolish the presumption of correctness and swing the burden to the Commissioner (see Kenya Revenue Authority v Man Diesel and Turbo Se, Kenya COMM TA No. E125 of 2020 [2021] eKLR).”

31. The Appellant insisted that the evidence requested for by the Commissioner was;i.Not available as a valuation report need not be done on sale of property on contractual terms, andii.The evidence, even if available would be relevant to the sale price and would not be relevant to the acquisition cost, which is the issue in dispute.

32. That by virtue of the fact that the Respondent did not provide the Appellant with the basis of the disallowance, the assessment was fatally defective. That in the absence of these workings, the Respondent's assessment was literally plucked from the air and had no basis in law. That the High Court deprecated such assessments in Republic v Kenya Revenue Authority Ex parte Jaffer Mujtab Mohamed [2015]eKLR where the Court held that;“46. Therefore whereas this Court is not entitled to question the merits of the decision of taxing authority, that authority must exercise its powers fairly and there ought to be a basis for the exercise of such powers. A taxing authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the Court in intervening.”

33. That accordingly, the purported disallowance of part of the acquisition cost by the Respondent lacks a factual and/or a legal basis.b.The stamp duty of Ksh 5,033,240. 00

34. The Appellant stated that in its computations in the objection decision and the assessment, the Respondent disallowed the stamp duty cost incurred by the purchaser on registration of the property. That it was a fact that in Kenya, on purchasing real property, the purchaser has a legal requirement to account for stamp duty pursuant to the Stamp Duty Act.

35. That at the time of purchase, the Appellant was by law required to pay 4% stamp duty on the value of the Property (Ksh 125,830,000. 00) which amounted to Ksh 5,033,200. 00. It averred that as is common practice in property transactions, the Appellant transferred the stamp duty to his Advocate for the Advocate to pay on his behalf. The Appellant referred the Tribunal to a copy of a swift message confirming transfer of Ksh 5,333,240. 00 to his Advocate. That the amount included a Ksh300,000. 00 legal fee for the Advocate.

36. The Appellant stated that in the objection decision, the Respondent averred that its basis for upholding the assessment was that there was no evidence of payment of stamp duty incurred at the time of acquisition. That this assertion was wrong.

37. The Appellant posited that it was quite appalling that the Respondent had allowed the legal fee of Ksh 300,000. 00 but disallowed the stamp duty cost of Ksh 5,033,200. 00, despite the same being paid in one tranche and supported by the same SWIFT transaction. That the Respondent had instead chosen to disallow the larger amount (the stamp duty) to increase its tax assessment. That this was a clear preconceived mindset to charge tax without a legal or factual basis.

38. The Appellant averred that Stamp duty is an incidental cost to a purchaser acquiring land in Kenya, and is expressly an allowable cost pursuant to Paragraph 8(1)(d) of the Eighth Schedule to the Income Tax Act. That accordingly, KRA's action of disallowing the stamp duty lacks a legal basis and the assessment on CGT ought to be vacated.

39. The Appellant submitted that it was also important for the Tribunal to take note that the Stamp duty payment requested for by the Respondent relates to a transaction that was concluded in 2016. That the statutory period for which the Appellant was required to retain documents for 2016 had however lapsed in 2021, three years before the Respondent issued its tax assessment.

40. That in the case of Republic v Commissioner of Domestic Taxes (Large Taxpayers Office) Ex-Parte Unilever Tea Kenya Limited [2017]eKLR, the High Court found that the Respondent's right to recover taxes is intrinsically tied to the period when documents are required to be retained by statute. That the Court stated as follows:“78. It is clear that a taxpayer is not obliged to keep records relating thereto for more than 5 years. In my view there is a good reason for this.It is not that after 5 year the taxpayer is likely to run out of storage facilities. To my mind the law appreciates that due to financial volatility in business transactions there ought to be a cut-off point so that business people ought to rest assured that after a certain period of time they will not be unduly harassed hence are at liberty to dispose of their records....”

41. That additionally in the case of Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) the Court found that the taxpayer is absolved of the burden of maintaining records after five years from the end of a reporting period.

42. That if the above errors made by the Respondent are rectified, i.e. the disallowed acquisition cost and stamp duty there will be no capital gain and as such. That the Appellant had in the foregoing, shown that the Respondent's CGT assessment had no legal and/or factual basis.

43. The Appellant prayed that the Tribunal quash the assessment for lacking a legal and a factual basis.Ground 2: The Respondent erred in law in demanding VAT on transfer of the property in contravention of Section 34(2) of the VAT Act

44. It was the Appellant’s argument that in its objection decision, the Respondent claims that sale of commercial property attracts VAT as per the VAT Act. That the Respondent further claims that the Appellant failed to charge VAT on the sale of property and was therefore demanding VAT of 14% on the transfer value of Ksh 175,000,000. 00, which amounts to Ksh 34,300,000. 00 (inclusive of penalties and interest).

45. The Appellant stated that the issue of whether transfer of commercial property is subject to VAT is being litigated at the superior courts and the Respondent is a party to these proceedings. That notwithstanding before the Courts agree on this treatment, the prevailing position is that VAT is chargeable on commercial buildings.

46. The Appellant further expounded on this ground below;a.The Appellant is not a registered person

47. The Appellant stated that what the Respondent failed to consider was that the Appellant was not registered for VAT and therefore could not charge VAT. That Section 5(1)(a) of the VAT Act provides that VAT shall be charged on a taxable supply made by a registered person in Kenya. To support this argument the Appellant attached his PIN certificate. That from this, it will be noted that the taxpayer did not have a VAT obligation.b.The Appellant is not required to register for VAT

48. The Appellant stated that the Respondent had further failed to consider the provisions of Section 34(2) of the VAT Act which provide as follows:-“34. Application for registration1. A person who in the course of a business-a.has made taxable supplies or expects to make taxable supplies, the value of which is five million shillings or more in any period of twelve months; orb.is about to commence making taxable supplies the value of which is reasonably expected to exceed five million shillings in any period of twelve months, shall be liable for registration under this Act and shall, within thirty days of becoming so liable, apply to the Commissioner for registration in the prescribed form:Provided that this section shall not apply to persons supplying imported digital services over the internet or an electronic network or through a digital marketplace in respect to a turnover threshold of five million shillings.2. In determining whether a person exceeds the registration threshold for a period, the value of the following taxable supplies shall be excluded-a.a taxable supply of a capital asset of the person; andb.a taxable supply made solely as a consequence of the person selling the whole or a part of the person's business or permanently ceasing to carry on the person's business.”

49. That the effect of Section 34(2)(a) of the VAT Act is that the supply of a capital asset is excluded from arriving at the Ksh 5 Million threshold for VAT registration in Section 34(1). That as such, a person who is not registered for VAT and who supplies a capital asset shall not be required to register for and charge VAT, despite the capital asset exceeding the Ksh 5 Million threshold.

50. The Appellant asserted that the Tax Appeals Tribunal had pronounced itself on similar issue in Tullow Kenya B.V-Vs-Commissioner of Domestic Taxes - Tax Appeals Tribunal Appeal No. 343 of 2019 (eKIR) (“the Tullow case") where the Appellant was not registered for VAT and had sold a capital asset. That in the Tullow case, the Tribunal while defining what amounts to a capital asset stated that:“The Respondent gave two definitions of capital asset. The first one was the definition given by the International Accounting Standards Board (IASB) which defines capital asset as "a resource controlled by the entity as a result of past events from which future economic benefits are expected to flow to the entity."Looking at the definitions and the illustrations above, we find that the interest in the oil blocks qualifies as a capital asset. This is because, the same are held for future economic benefits expected to flow from the entity once the production and sale of crude oil commences. The licensing, exploration, appraisal and development stages are considered developing of an asset.”

51. The Appellant averred that from the foregoing definition, it was not in doubt that land is a capital asset. That the Appellant had acquired the land and future economic benefits were expected to flow once either the land is used to generate income or sold for a gain. That for accounting purposes, land and buildings are capitalized in the balance sheet. That the Respondent itself collects Capital Gains Tax on the sale of land as it is a capital asset.

52. The Appellant submitted that at Paragraph 92 of the Tullow case, the Tribunal found that the Appellant was not required to register for VAT pursuant to Section 34(2) of the VAT Act.

53. That from the foregoing, it is evident that the taxpayer was not registered and was not required to register for and charge VAT on the sale of the property. That the VAT demand therefore had no legal and/or factual basis and should be vacated.

54. The Appellant prayed that the Tribunal vacates the Respondent's VAT assessment of Ksh 34,300,000. 00 (inclusive of penalties and interest).Ground 3: The Respondent has erred in demanding WHT from the taxpayer and that the effect of the Respondent's demand is to subject a fee to income tax twice.

55. The Appellant contended that the Respondent had in its objection decision demanded WHT of Ksh 160,782. 00 (inclusive of penalties and interest). That the Respondent averred that this was in relation to legal fees paid of Kshs 1,527,550. 00 to the Appellant's Advocates at the time of sale of the land and that WHT was not deducted thereon. That the fees in the mentioned invoice subject to withholding amounted to Kshs 1,312,500. 00.

56. The Appellant averred that as the Advocate declared the entire legal fees in its return and did not take a benefit/credit from a WHT credit, the Respondent's attempt to demand the tax from the Appellant amounts to double taxation which is illegal.

57. That the eventual effect of this assessment seeks to collect the 5% withholding tax from the Appellant even after the law firm which received 100% of the invoices amount accounted the income in its return to the Respondent.

58. The Appellant submitted that it goes against the tax principles of fairness as in this instance, the Respondent seeks to collect an additional 5% from the Appellant even after the lawyers of the Appellant accounted for the income in their return.

59. The Appellant averred that the Respondent should not at any point in its mandate demand the same tax from two different taxpayers, especially tax from the same invoice and/or transaction.

60. That the Act provides for a penalty of 5% of the tax due and the Respondent can levy such a penalty. That Logic does not warrant assessing the principal tax as the responsibility of withholding has been overtaken by events after the law firm declared the return capturing 100% of the invoice.

61. That it would also be disingenuous for the Respondent to assess the Appellant without giving the law firm a credit on their ledger equivalent to the 5% of the invoice for its income tax.

Appellant’s Prayer 62. The Appellant made the following prayers:a.That this Appeal be allowed.b.Further that the Tribunal be pleased to:-i.Set aside and quash the objection decision issued by the Respondent;ii.Order that the Respondent pays the costs of this Appeal; andiii.Make such other orders that it may deem appropriate.

Respondent’s Case 63. The Respondent relied on following documents filed before the Tribunal;i.Its Statement of Facts dated 15th April 2024 and filed on 18th April 2024. ii.Its written submissions dated and filed on 12th August 2024.

64. The Respondent stated that it issued a notice of assessment dated 29th November 2023 after conducting a verification exercise in respect of the transfer of property Title Number L.R 12775. That the assessments raised was on Capital Gains tax, VAT and Withholding tax.

65. That the Appellant lodged an objection application of the assessment on 18th December 2023 through iTax

66. The Respondent averred that it requested the Appellant to avail records to validate the objection application but he failed to do so despite several reminders. That subsequently it fully rejected the objection on 13th February 2024.

67. The Respondent was of the view that the issues raised in the Appellant’s grounds in the Memorandum of Appeal could be summarized as;i.Whether the Respondent erred in law and fact in disallowing part of the acquisition cost i.e, the legal fees and the stamp duty incurred at the time the taxpayer purchased the property.ii.Whether the Respondent erred in demanding VAT on transfer of the property in contravention of Section 34(2) of the VAT Act.iii.Whether the Respondent erred in demanding WHT from the taxpayer and that the effect of the Respondent's demand is to subject a fee to income tax twice.iv.Whether the Respondent's conduct is unfair and infringes on the taxpayer's rights and freedoms under the Constitution.

68. According to the Respondent, the assessment was based on a sale of commercial property with the Appellant as the seller. That the Respondent partially disallowed the cost of acquisition and fully disallowed the stamp duty.

69. That the Appellant lodged an invalid objection as the same was not supported by the relevant documents contrary to Section 51 (3)(c) of the Tax Procedures Act that stipulates:3. A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension oftime to pay the tax not in dispute under section 33(1); andc.all the relevant documents relating to the objection have been submitted.”

70. The Respondent’s view was that there was only one issue for determination by this Tribunal which is, whether the Appellant validly lodged his objection.

71. The Respondent averred that on 21st December 2023, it engaged the Appellant requesting him to validate his objection within 14 days. That a reminder was sent to him on 12th January 2024 but the Appellant still failed to provide the relevant documents.

72. The Respondent stated that it made a follow up after both parties held a physical meeting on 18th January 2024 requesting the Appellant to provide the following documents:i.The valuation report for the sale of property at Kshs.175,000ii.Evidence of stamp duty paid to the Respondent.

73. That the Appellant alleged that there was no valuation report done by him or the buyer at the time of sale and that the valuation was done by a Government valuer as part of the transfer process.

74. The Respondent submitted that the Appellant relied on the Sale Agreement that shows the subject property was sold for Kshs. 175,000,000. 00 which raises suspicion since it is common knowledge that the sale price in the sale agreement and transfer documents are normally reduced for purposes of reducing the tax liability i.e stamp duty payable.

75. The Respondent averred that the Appellant did not provide the requisite documents to support his objection and therefore failed to validate the same. That the Respondent proceeded to confirm its assessment.

76. The Respondent contended that the Appellant was in contravention of Section 59 of the Tax Procedures Act which mandates him to provide documentation to enable the Respondent determine the tax liability with regards to the sale of the commercial property in question. That the Section states:“For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to-a.produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;b.furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; or”

77. That the Respondent was thus unable to verify the actual acquisition cost of the property.

78. It submitted that Section 24 of the Tax Procedures Act allows the Commissioner to assess a taxpayer's tax liability using any information available to it.

79. The Respondent stated that in the absence of the Appellant providing the desired information and documentation to facilitate in the assessment and verification of the actual acquisition cost of the property it is empowered by Section 31(1) of the Tax Procedures Act to use its best judgment in making the tax assessment.

80. That the Appellant alleged that the property in question falls under Section 34(2) of the VAT Act, classifying it as a capital asset. The Respondent stated that Title Number L.R 12775 is not a capital asset hence should have charged VAT on the sale of the commercial property.

81. The Respondent stated that the Appellant did not charge Withholding income tax on the legal fees paid. That the Appellant, being the one who made the payment had an obligation to withhold and remit the same to the Respondent.

82. That Section 10 and 35 of the Income Tax Act provides that professional fees shall be deemed to be income chargeable to withholding tax. That this includes the legal fees paid by the Appellant on the transfer of property.

83. That the Appellant also had a responsibility to maintain proper documentation such as withholding tax certificates in order to prove the withholding tax deductions.

84. That additionally, Section 56(1) of the Tax Procedures Act places the burden on the taxpayer to prove that a tax decision is incorrect.

85. The Respondent averred that it had in no manner infringed on the Appellant's rights and that the Appellant was the one who had slept on the same through his actions and omissions.

86. The Respondent posited that the allegations of the Appellant as laid out in the Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence.

Respondent’s Prayer 87. The Respondent prayed that the Tribunal:a.Upholds the Respondent's objection decision dated 13th February 2024 and confirms the assessments for Capital Gains tax, VAT and WHIT amounting to Kshs. 28,201,958 principal tax.b.Dismiss this appeal with costs to the Respondent as the same is without merit.

Issues For Determination 88. The Tribunal has gleaned through the pleadings and documents filed by the parties in this Appeal and it is of the considered view that the issues that falls for determination in this Appeal are:a.Whether the Respondent erred in disallowing part of the Appellants acquisition costs and thereafter assessing CGT.b.Whether the Respondent erred in its assessment of WHT.c.Whether the Respondent erred in its assessment of VAT.

Analysis And Determination 89. The Tribunal having established the issues for its determination, proceeds to analyse each separately as hereunder.a.Whether the Respondent erred in disallowing part of the Appellant’s acquisition costs and thereafter assessing CGT.

90. The events leading to this dispute are as follows;i.The Appellant purchased a piece of land and registered at Lands Ministry on 15th June 2016. ii.The Appellant subsequently sold the land to Steelstone Kenya Ltd on 24th September 2020. iii.The Respondent raised assessments vide a letter dated 29th November 2023 in relations to the transaction of 24th September 2020 leading to this dispute

91. The main issue in dispute here is the Respondent’s decision to disallow part of the acquisition cost and the stamp duty incurred by the Appellant at the time of purchase of the property.

92. It was the Appellant’s contention that it was an uncontroverted fact that the Appellant acquired the property from the Partnership at a cost of Ksh 125,830,000. 000. That this was clear from the transfer dated 10th June 2016 and registered at the lands registry on 15th June 2016. That this fact was further buttressed by the registration on the title which indicates the transfer amount as Ksh 125,830,000.

93. That the Respondent did not provide the Appellant with a factual or legal basis for the purported adjustment of the acquisition cost, either in the notice of assessment or objection decision. The Appellant reiterated that this issue was pointed out in the Appellant's notice of objection and the Respondent still did not provide a basis for the disallowance in the objection decision.

94. The Respondent on its part averred that the Appellant did not provide the requisite documents to support his objection and therefore failed to validate the same.

95. The Respondent contended that the Appellant was in contravention of Section 59 of the Tax Procedures Act which mandates him to provide documentation to enable the Respondent determine the tax liability with regards to the sale of the commercial property in question.

96. The Tribunal notes that the jist of the matter in this issue is the disallowed acquisition costs and stamp duty of the property by the Appellant in 2016. The Appellant had claimed the acquisition cost of Ksh 125,830,000. 00 while the Respondent used an acquisition cost of Ksh 58,136,578.

97. To support its claim, the Appellant provided transfer and registration documents registered with Lands Department Registry and registered on 15th June 2016. The same shows that the purchase price was Kshs 125,830,000. 00 with a stamped showing that duty had been paid and also the Swift Transfer of money for legal fees and stamp duty to its Advocate. The Tribunal further notes from the Appellant’s objection that these documents were provided to the Respondent.

98. The Respondent however in rejecting the Appellant’s objection stated that it made a follow up after both parties held a physical meeting on 18th January 2024 requesting the Appellant to provide the following documents which were not provided:i.The valuation report for the sale of property at Kshs.175,000ii.Evidence of stamp duty paid to the Respondent.

99. The Appellant on its part averred that that the valuation report requested for by the Respondent was in relation to the sale of the Property by the Appellant to Steelstone Limited (that this was the transaction for Kshs 175,000,000), while the issue in dispute is the acquisition cost of the Property by the Appellant from the Partnership (acquisition cost of Ksh 125,830,000). That the valuation report on sale (if any) was irrelevant to the cost that the Appellant acquired the Property.

100. The Tribunal perused through the documents presented and notes that the Appellant provided the documents regarding the acquisition costs that demonstrate the purchase price and the evidence that the stamp duty had been paid. The Respondent has not challenged the authenticity of these documents.

101. The Tribunal holds the position that the Appellant had provided sufficient documents to support its claim for acquisition costs.

102. This was the finding in McMillan v. Canada 2012 FCA 126 where the Court of Appeal held that:“In our respectful view, it is settled law that the initial onus on an appellant taxpayer is to "demolish" the Minister's assumptions in the assessment. This initial onus of "demolishing" the Minister's assumptions is met where the taxpayer makes out at least a prima facie case. Once the taxpayer shows a prima facie case, the burden is on the Minister to prove, on a balance of probabilities, that the assumptions were correct.”

103. Additionally it is further the view of the Tribunal that the request for the 2016 documents by the Respondent was also time barred as provided under Section 31(4) of the Tax Procedures Act which states as follows;“23. Record-keeping1. A person shall—a.maintain any document required under a tax law, in either of the official languages;b.maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; andc.subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”(Emphasis added)

104. Besides this, it is the view if the Tribunal that the Respondent’s request for documents in relations to the sale of the property by the Appellant to Steelstone Kenya Limited in 2020 was not relevant here because the issue at hand is the cost of acquisition of the property in the year 2016.

105. Consequently, the Tribunal determined that the Respondent erred in disallowing the purchase costs of the property by the Appellant and thereafter assessing CGT.b.Whether the Respondent erred in its assessment of WHT.

106. The Tribunal notes that the Respondent in its objection decision confirmed WHT assessments in relation to professional legal fees paid by the Appellant during the sale of the property.

107. The Appellant averred that as the Advocate declared the entire legal fees in its returns and did not take a benefit/credit from a WHT credit. That the Respondent's attempt to demand the tax from the Appellant amounts to double taxation which is illegal.

108. That the eventual effect of this assessment seeks to collect the 5% withholding tax from the Appellant even after the law firm which received 100% of the invoices amount accounted the income in its return to the Respondent.

109. The Appellant submitted that it goes against the tax principles of fairness as in this instance, the Respondent seeks to collect an additional 5% from the Appellant even after the lawyers of the appellant accounted for the income in their return.

110. The Respondent on its part stated that the Appellant did not charge Withholding Income tax on the legal fees paid. That the Appellant, being the one who made the payment had an obligation to withhold and remit the same to the Respondent.

111. That Sections 10 and 35 of the Income Tax Act provides that professional fees shall be deemed to be income chargeable to withholding tax. That this includes the legal fees paid by the Appellant on the transfer of property.

112. Section 35(3)(f) of the Income Tax Act which imposes withholding tax on management services states that:“Subject to section 3A, a person shall, upon payment of an amount to a person resident or having a permanent establishment in Kenya in respect of;f.management or professional fee or training fee, the aggregate value of which is twenty thousand shillings or more in a month.”

113. It was not in dispute that the payments to the Advocate fell under the category of professional fees chargeable to WHT. From the Above provision of the law, it follows that the Appellant ought to have withheld tax and remitted to the Respondent in respect to payments of legal fees.

114. The Appellant in his explanation on this issue stated that his Advocate declared the entire legal fees in its return and did not take a benefit/credit from a WHT credit.

115. However, Section 39A of the Tax Procedures Act provides as follows regarding deduction of WHT;“where a person who is required under a tax law to deduct or withhold tax and remit the tax to the Commissioner fails to do so, the provisions of this Act relating to the collection and recovery of tax, and the payment of penalties and interest thereon, shall apply to the collection and recovery of that tax not deducted or withheld as if it were tax due and payable by that person and the due date for the payment shall be the date on which the amount of tax should have been remitted to the Commissioner.”

116. The Tribunal therefore hold the position that the Appellant failed to withhold the tax on payments to his advocate as required by law.

117. The Tribunal reiterates the finding in the case of Mount Kenya Bottlers Limited & 3 Others V Attorney General & 3 Others [2012] eKLR, Where Hon Lenaola J cited a statement by Justice G. P. Singh who stated that;” Whether the taxation imposed is unfair, harsh or inequitable cannot be the reason for holding that it should not be imposed. It is the duty of the state to impose taxation and it is the duty of its subjects to pay such taxes as are so imposed.”

118. Consequently, the Tribunal finds that the Respondent did not err in its assessment for WHT.c.Whether the Respondent erred in its assessment of VAT.

119. The Appellant was assessed for VAT by the Respondent who asserted that the property was a commercial property which in its view attracts VAT.

120. The Appellant stated that what the Respondent failed to consider was that the Appellant was not registered for VAT and therefore could not charge VAT. That Section 5(1)(a) of the VAT Act provides that VAT shall be charged on a taxable supply made by a registered person in Kenya. To support this argument the Appellant attached his PIN certificate. That from this, it will be noted that the taxpayer did not have a VAT obligation.

121. That further, the Respondent had further failed to consider the provisions of Section 34(2) of the VAT Act

122. The Respondent on its part stated that Title Number L.R 12775 was not a capital asset hence should have charged VAT on the sale of the commercial property.

123. The Tribunal notes that the point of divergence between the arguments of the parties is the treatment of the transaction. While the Appellant argued that this property should be treated as a capital asset, the Respondent’s argument was that this transaction was sale of commercial property chargeable to VAT.

124. The Tribunal perused the documents presented and noted that from the sale agreement registered with the Lands Department the property in question was indicated as ‘Land Reference Number 12775’. It was not in dispute that the Appellant bought the property in 2016 and later sold it in 2020. It was further not in dispute that prior to this transaction, the Appellant was not registered for VAT.

125. Section 34(1) of the VAT Act provides as follows regarding registration for VAT purposes;“A person who in the course of a business—a.has made taxable supplies or expects to make taxable supplies, the value of which is five million shillings or more in any period of twelve months; orb.is about to commence making taxable supplies the value of which is reasonably expected to exceed five million shillings in any period of twelve months, shall be liable for registration under this Act and shall, within thirty days of becoming so liable, apply to the Commissioner for registration in the prescribed form.”

126. The Tribunal notes that the property was described in all documents as land with a reference LR number. Additionally, there was no evidence that the Appellant dealt in property therefore the Tribunal was of the view that Section 34(2)(a) of the VAT Act applies in this case. Section 34(2)(a) of the VAT Act provides as follows;“In determining whether a person exceeds the registration threshold for a period, the value of the following taxable supplies shall be excluded—a.a taxable supply of a capital asset of the person; andb.…” (Emphasis added)

127. It is further worth noting that the Respondent has indeed subjected the same to CGT which supports the argument that this was a capital asset the Appellant had purchased and later disposed

128. From the provisions of Section 34(1) & (2)(a) of the VAT Act it follows that the Appellant was not required to register for VAT for purpose of this transaction as it was not subject to VAT.

129. The Tribunal reiterates the finding in T.M. Bell v Commissioner of Income Tax [1960] EALR 224 where Roland J. Stated:“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.”

130. Accordingly, the Tribunal finds that the Respondent erred is assessing VAT

Final Decision 131. From the foregoing analysis the Tribunal determines that this Appeal is partially merited and proceeds to issue the following Orders;a.The Appeal be and is hereby partially allowed.b.The Respondent’s Objection decision dated 13th February 2024 is varied in the following terms;i.The Assessments for CGT is set aside.ii.The assessments for WHT is upheld.iii.The assessments for VAT is set aside.c.Each party is to bear its own costs.

132. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 25TH DAY OF OCTOBER, 2024. ERIC NYONGESA WAFULACHAIRMANDR. RODNEY O. OLUOCH ABRAHAM K. KIPROTICHMEMBER MEMBERCYNTHIA B. MAYAKA GLORIA A. OGAGAMEMBER MEMBER