On 23rd August 2021, the High Court of Kenya recently ruled against the Commissioner of Domestic Taxes for failure to issue an Objection Decision within the statutory 60 days.
In Civil Appeal No. ITA E069 of 2020 which is a consolidation of ITA No. E069 of 2020 and ITA No. 025 of 2020, the court ruled in favor of the Respondent, Equity Group Holdings Limited, who was the Appellant in the 1st Appeal, and the Respondent before the Tax Appeals Tribunal in (TAT) in ITA No. 27 of 2017. Both matters sought to set aside the same decision.
Brief facts of the case
Pursuant to an amendment to the Banking Act, Cap 488 recognizing non-operating holding companies and banking groups, Equity Bank Limited sought the requisite approvals from the Capital Markets Authority, and the Competition Authority of Kenya to undertake internal restructuring to create a non-operating holding company. They received the necessary approvals on 15th October 2014 from the Capital Markets Authority, and on 28th November 2014 from the Competition Authority of Kenya. The restructuring then took effect on 31st December 2014, with a new entity, a non-operating holding company created, namely Equity Bank Kenya Limited.
The Commissioner of Domestic Taxes conducted a review of the restructuring exercise and determined that Capital Gains Tax (CGT) arose from the transaction, issuing a tax demand to Equity Bank Kenya Limited on 10th October 2016 for payment of CGT relating to the transfer of net banking assets from Equity Bank Limited to Equity Bank Kenya Limited, amounting to K.Shs. 330,858,696, inclusive of penalties and interest.
The parties met on 2nd November 2016 but failed to resolve the matter.
Equity Bank Kenya Limited filed a Notice of Objection on 9th October 2016 objecting to the entire amount, to which the Commissioner of Domestic Taxes reviewed the objection and adjusted the tax demand to K.Shs. 820,406,196. This was confirmed by an Objection Decision dated 9th January 2017.
Equity Bank Kenya Limited appealed this decision on the basis that, among other grounds, it was time barred, having been made contrary to Section 51 of the Tax Procedures Act and ought to be set aside.
The Commissioner of Domestic Taxes responded that the Objection Decision was not time barred, and made submissions praying that the TAT find the Decision to be within the provisions of Section 51 dismiss the appeal with costs.
The court noted that the 60th Day was 8th January, which fell on a Sunday, and therefore the Objection Decision ought to have been issued and delivered latest Friday 6th January, 2017. However, the TAT held that “though the wording in Section 51 of the TPA is framed in mandatory terms, the Tribunal would invoke the Provisions of Article 159 of the Constitution in order not to shut out the Respondent (The Commissioner) on this technical ground” and thus admitted the Objection Decision, allowing the appeal.
Equity Bank Kenya Limited, dissatisfied with the decision, then lodged the 2nd Appeal, seeking to overturn the decision.
The Appeal
The Court noted that the heart of the appeal lies in the interpretation of Section 51(11) of the Tax Procedures Act, and the consequences of the Commissioner’s failure to render an Objection Decision within the statutory time frame.
In its holding, the Court also stated that the general rule of interpretation is that an absolute enactment must be obeyed, or fulfilled, substantially, and that some rules are vital and go to the root of the matter – they cannot be broken, while others are only directory and a breach of them can be overlooked, provided there is substantial compliance.
Concluding its decision, the Court stated that “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, and that one can only look fairly at the language used.”
The Orders of the Court
The Court ordered, on the basis of the submissions placed before it that the Objection Decision dated 9th January be set aside in its entirety and costs awarded to Equity Bank Kenya Limited, the appellant in this matter.
Conclusion
It is prudent to strictly observe statutory timelines in order to avoid heavy losses. If you find yourself in any doubt, don’t hesitate to consult a Tax Representative to assist you to meet the necessary obligations.