Court sides with firm in rental tax dispute with KRA

A decision by the Kenya Revenue Authority (KRA) to demand rental income tax from dormant companies is set to cost the taxpayer millions of shillings in litigation.

This was evident in a case in which the taxman slapped a Sh2 million tax and penalties on a firm that owned the demolished Nakumatt Thika Road outlet despite Fleur Investments Limited having been dormant since 2012.

Justice John Mativo said courts may exercise their powers of judicial review to ensure the Commissioner of Domestic Taxes does not abuse his discretion under the law. He added that failure to render a decision as the law requires warrants court intervention.

“A person aggrieved by the manner in which the commissioner exercised his statutory powers or discretion or fails to exercise his power as has happened in this case is perfectly entitled to seek remedy from the court,” the judge said in his decision barring KRA from demanding the money from the firm. Fleur Investments ceased engaging in real estate on commercial properties and does not earn rental income from residential properties since 2012, but on May 15, 2018, KRA registered it for rental income tax obligation.

KRA made an e-return acknowledgement receipt for tax return, claiming to have been made by the firm and forwarded an email that Fleur had not paid tax rental income earned in January 2016.

The taxman then issued a payment defaulter notice to the company for January, February and March 2016.

In November 2018, KRA wrote to the company that it expected rent revenues of Sh2,007,600 for 2017. The company wrote to KRA seeking revocation of the tax claims and requested for investigations to be conducted on the acknowledgment receipt.

It then filed an application at the High Court under Judicial Review to quash KRA’s November 18 demand for Sh2,007,600 and for the court to make a declaration on the acknowledgment receipt including the May 2018 demand letter. The court was told the commissioner acted without any factual basis by auto registering the company for Income Tax Rental Income obligation, yet it was aware that it was a dormant company and had no income. Fleur argued it was unfair for KRA to fail to provide details of the residential property from which it derives rental income.

KRA argued the application was unmerited, an abuse of court process and aimed at circumventing the law, adding that it also presented a purely tax dispute and as such, the court was the wrong forum to determine the dispute.

In 2018, Court of Appeal stopped KRA from demanding income tax worth Sh600 million. Officers from the agency were barred by the Appellate court from demanding the money after it was found that KRA had not given the firm any explanation on how the amount was arrived at.

“In this case from the record before us and the correspondence between the parties herein, and the clear inconsistencies in the respondents’ actions, it is clear the respondents proceeded on erroneous state of facts, either mistakenly or mischievously in a bid to punish the appellant for no justifiable reason, and in doing so did not act in good faith whatsoever,” reads the Appeals court judgement.