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Court of AppealAllowedCivil Appeal (memorandum of appeal dated 1st April, 2009)· [2016] KECA 650 (KLR)

Kenya Revenue Authority v Yaya Towers Limited [2016] KECA 650 (KLR)

Court of Appeal
15 April 2016
Martha Karambu KoomeM. K. KoomeFSF. SichaleJOJ. Otieno-Odek
2,710 words in judgment
View original judgmentRead on Kenya Law Watch case
AI-assisted case brief
·~11 min to read original · ~4 min brief

The bottom line

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Kenya's Court of Appeal ruled that even income from illegal business must be taxed — illegality is no escape from KRA assessments.

What this practically means

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Executive summary

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The Kenya Revenue Authority appealed against a High Court judgment of Nyamu, J delivered on 21st November, 2008, which had quashed by certiorari and prohibited by prohibition the KRA's decision of 31st March, 2006 demanding PAYE arrears of Kshs. 17,775,190.10 in respect of emoluments paid to one David Peter Saunders under a consultancy arrangement. The respondent had argued that Saunders' engagement was illegal, so no tax was payable, relying on Omega Enterprises (K) Ltd v KTDC on the nullity of void acts. The appellant, relying on English authorities including Mann v Nash, Southern v A.B, F.A. Lindsay v CIR and CIR v Aken, contended that income is taxable regardless of the illegality of its source. In a single judgment of the court, delivered at Nairobi on 15th April, 2016 by Koome, Sichale and Otieno-Odek, JJA, the Court of Appeal held that profits from an illegal business or illegal services are still subject to taxation, adopting the Commonwealth reasoning that the Revenue merely taxes an accomplished fact without condoning illegality, and that the contrary view would absurdly exempt dishonest gains while taxing honest ones and would encourage taxpayers to taint their businesses with illegality. The court further held that the alternative remedy of penalty or prosecution under Sections 37 and 109(1)(f) of the Income Tax Act concerns non-compliance with payment of tax and does not oust assessment of illegal income. The appeal was allowed with costs and the High Court ruling of 21st November, 2008, together with all consequential orders, was set aside.

Key legal issues

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01

Whether profits from an illegal trade are subject to income tax

Holding

Yes - profits from illegal business are taxable

Reasoning

Relying on a long line of Commonwealth authorities (Mann v Nash; Southern v AB; F.A. Lindsay v CIR; CIR v Aken), the court held that the Revenue taxes an accomplished fact and does not condone illegality. Holding otherwise would let wrongdoers benefit from illegal profits and escape tax, would tax honest gains while dishonest gains escaped, and would incentivise taxpayers to taint their businesses with illegality to secure exemption.

p. 5
02

Whether the alternative remedy of prosecution under Section 109(1)(f) of the Income Tax Act displaces assessment of tax on illegal income

Holding

No - the alternative remedy applies to non-compliance with payment of tax, whether from an illegal or honest trade, and does not exempt illegal income from assessment.

Reasoning

The court accepted that the Income Tax Act provides a penalty/prosecution remedy under Sections 37 and 109(1)(f) for employer non-compliance, but held that this is incidental. Once illegal trade is held taxable, the alternative-remedy argument does not arise, since prosecution addresses non-payment of tax rather than the taxability of the income itself.

p. 6

Legal principles established

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  • Income derived from an illegal trade or business is nonetheless taxable; illegality of the source does not exempt profits from income tax.
  • It is irrelevant that the trade was carried on unlawfully; profits must be assessed under the statute once a trade and profit are established.

Court orders

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  1. 1.Appeal allowed with costs
  2. 2.Ruling of the High Court dated 21st November, 2008 set aside together with all consequential orders

Authorities

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Legislation

  • Income Tax Act, Cap. 472Section 3(1)
  • Income Tax Act, Cap. 472Section 37
  • Income Tax Act, Cap. 472Section 109(1)(f)
  • Law Reform ActSection 8
  • Civil Procedure RulesOrder LIII

Cases cited (5)

  • Mann v Nash (H.M Inspector of Taxes)
    Vol. 16 Part 8 Tax Cases 523; [1932] 1 K.B 752
  • Southern (H.M Inspector of Taxes) v A.B
    Tax Cases Volume 18 page 59; [1933] 1 K.B 713
  • F. A. Lindsay, E.A Woodward and W. Hiscox v The Commissioner of Inland Revenue
    Tax Cases Volume 18 Page 43
  • Commissioner of Inland Revenue v Aken
    Tax Cases Volume 63 Page 395; [1988] QBD
  • Omega Enterprises (K) Ltd. v KTDC & Others
    Civil Appeal No. 59 of 1993
On appeal from
High Court
Jurisdiction invoked
First appeal/judicial review appeal under Section 8 of the Law Reform Act and Order LIII of the Civil Procedure Rules; memorandum of appeal dated 1st April, 2009 (no constitutional provision stated)

Key timeline

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Practical implications

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Frequently asked questions

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Cite this brief

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Cite this brief

Caselaw, "Kenya Revenue Authority v Yaya Towers Limited [2016] KECA 650 (KLR)", Case Analysis (2016). Civil Appeal (memorandum of appeal dated 1st April, 2009). Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2016/650/eng@2016-04-15

Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.