Kenya Bankers Association v Kenya Revenue Authority [2018] eKLR

Key Facts

Tax Type

Issues

• Whether the chargee or the chargor is legally responsible for paying Capital Gains Tax in a forced sale, given the chargee's role as a nominee and the lack of proprietary ownership or gain by the chargee.
• Whether the Kenya Revenue Authority's administrative action requiring simultaneous online payment of Stamp Duty and Capital Gains Tax via the I-tax system is reasonable, fair, and lawful, particularly when no acknowledgment number for CGT is available.
• Whether the duty or obligation to pay Capital Gains Tax rests on a chargee (e.g., a bank) upon exercising its statutory power of sale, as opposed to the chargor (landowner).

Tax Years

• 2015
• 2014

Holdings

• The court determined that Capital Gains Tax is payable by the chargor (landowner) upon registration of the transfer under paragraph 5(2) of the Eighth Schedule to the Income Tax Act. Chargees are only liable for CGT if there is a surplus from the sale proceeds, making them trustees for the chargor.
• The court declared that the Kenya Revenue Authority's (KRA) administrative action requiring simultaneous payment of Stamp Duty and Capital Gains Tax (CGT) on land sales by chargees under statutory power is unreasonable, unfair, and influenced by an error of law. The court emphasized that CGT liability must be determined on a case-by-case basis and cannot be imposed administratively without clear statutory provisions.
• The court ruled that requiring payment of Capital Gains Tax by a chargee or purchaser without first determining whether a capital gain exists is unreasonable and procedurally unfair. The court highlighted that CGT liability depends on the chargor's ownership and the absence of clear statutory obligation on chargees to pay CGT.

Remedies

• d) An order of mandamus compelling the respondent to allow payment of Stamp Duty on an instrument of transfer following the sale of land by a chargee pursuant to a chargee's power of sale, without requiring payment of Capital Gains Tax or an acknowledgment number for payment of Capital Gains Tax.
• a) A declaration that the administrative action by the respondent requiring simultaneous payment of Stamp Duty and Capital Gains Tax on sale of land by a chargee pursuant to a chargee's power of sale is unreasonable, unfair and influenced by an error of law.
• b) A declaration that the administrative action by the respondent requiring payment of Capital Gains Tax by the chargee or purchaser on the sale of land by a chargee pursuant to a chargee's power of sale without first ascertaining whether there is in fact capital gain is unreasonable, unfair and influenced by an error of law.
• c) A declaration that on the sale of land by a chargee pursuant to a chargee's statutory power of sale, Capital Gains Tax is payable upon registration of the transfer by the chargor of the land pursuant to paragraph 5(2) of the Eighth Schedule of the Income Tax Act and not by the chargee or purchaser, unless there is a surplus from the proceeds of sale as to constitute the charge a trustee for the chargor.

Tax Issue Category

Legal Principles

• The court applied the Literal Rule in interpreting tax legislation, emphasizing that taxation must be based on clear and unambiguous statutory language. As stated in cases like Cape Brandy Syndicate v Inland Revenue Commissioners and T.M. Bell v Commissioner of Income Tax, the language of a taxing statute must be strictly adhered to, with no room for implication or intendment. A taxpayer is not liable for tax unless the statute explicitly imposes it.
• The court invoked the Contra Proferentem principle, which holds that ambiguity in a statute should be resolved in favor of the taxpayer. This was reinforced by references to Brooms Legal Maxims and the reasoning in Jotham Mulati Welamondi vs. The Electoral Commission of Kenya, where the inclination of the court was against interpretations that impose burdens or duties on the subject.
• The burden of proof in tax matters lies with the taxing authority. The court reiterated that the Crown (or tax authority) must establish that a taxpayer falls within the unambiguous terms of the statute, as highlighted in Adamson v Attorney General and reaffirmed in this case. This principle ensures that taxpayers are not taxed without clear legislative basis.

Precedent Name

• Kanjeed Naranjee v Income Tax Commissioner
• Jafferali Alibhai v Commissioner of Income Tax
• Law Society of Kenya vs. Kenya Revenue Authority & Another
• Mohamed Ahmed vs. R
• Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others
• Republic vs. Commissioner of Domestic Taxes Large Tax Payer's Office Ex-Parte Barclays Bank of Kenya LTD
• Judicial Service Commission vs. Mbalu Mutava
• Vestey vs. Inland Revenue Commissioners
• Republic vs. Kenya Revenue Authority Ex-parte Bata Shoe Company (Kenya) Limited
• Jotham Mulati Welamondi vs. The Electoral Commission of Kenya
• Farmers Bus Service & Others vs. Transport Licensing Appeal Tribunal
• Samura Engineering Limited and & Others vs. Kenya Revenue Authority
• Russell v Scott
• Cape Brandy Syndicate v Inland Revenue Commissioners
• T.M. Bell v Commissioner of Income Tax

Cited Statute

• Land Act
• Income Tax Act
• Fair Administrative Action Act
• Kenya Revenue Authority Act
• Finance Act
• Stamp Duty Act
• Land Registration Act

Judge Name

Passage Text

• The issue before me as far as I can gather is whether the duty or obligation to pay capital gains tax rests on a chargee upon the exercise its statutory power of sale.
• It is no good answer for the taxman to proclaim that Kshs 1 billion (appx) is intended to swell the public treasury because due to the application of the above principles that money is not lawfully due.
• A chargee who exercises a power to sell the charged land... shall have effect as a security only and shall not operate as a transfer.