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Court of AppealDismissedCivil Appeal No. 69 of 2016· [2017] KECA 360 (KLR)

Kioko Joseph (Suing as the legal representative of the Estate of Joseph Kilinda) v Bamburi Cement Ltd [2017] KECA 360 (KLR)

Court of Appeal
22 June 2017
AVAlnashir VisramWKW. KaranjaMartha Karambu KoomeM.K. Koome
1,860 words in judgment
View original judgmentRead on Kenya Law Watch case
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The bottom line

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Kenya's Court of Appeal confirmed that employment termination awards are fully taxable, so employers must deduct P.A.Y.E before paying the balance.

What this practically means

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Executive summary

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The Court of Appeal at Mombasa (Visram, Karanja and Koome, JJ.A) dismissed an appeal against a ruling of Rika, J. of the Employment and Labour Relations Court concerning whether an ELRC award for wrongful termination is subject to statutory deductions, particularly P.A.Y.E. The underlying judgment had awarded the deceased six months' salary, gratuity, and unpaid leave; a prior appeal by the respondent was dismissed with the sums made subject to statutory deductions. The respondent withheld Kshs. 2,634,532/= as P.A.Y.E, prompting the appellant to issue warrants of attachment, and the trial judge directed the disputed sum be deposited in a joint interest-earning account, involved KRA in recomputation, and stayed execution. The appellant argued on appeal that no provision of the Income Tax Act authorises taxation of ELRC awards, that Section 37 applies only to current employees, and that only the six months' compensation was taxable under Section 49(2) of the Employment Act. The Court rejected these submissions, holding that Section 19(1)(f) of the Employment Act permits deductions authorised by written law and that the Income Tax Act charges tax on gains or profits from employment, which include wages, salary, gratuity and other payments in respect of employment. Relying on its own decision in Directline Assurance Co. Ltd vs. Jeremiah Wachira Ichaura, the Court affirmed that the entire global award was subject to taxation and that the judge correctly involved KRA, the body charged with revenue assessment. The auctioneer's fees ground failed as it had not been raised before the trial court. The appeal was dismissed with costs.

Key legal issues

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01

Whether an ELRC award for wrongful termination is subject to statutory deductions including P.A.Y.E

Holding

Yes. Sections 19(1)(f) and 49(2) of the Employment Act and Sections 3(1), 5(2) and 37 of the Income Tax Act together render the entire award, being gains or profits from employment including gratuity and compensation, subject to statutory deductions.

Reasoning

Section 19(1)(f) of the Employment Act permits deductions authorised by written law, and Section 49(2) makes payments for unjustified termination subject to statutory deductions. The Income Tax Act charges income tax on gains or profits from employment, which expressly include wages, salary, leave pay and gratuity. Section 37 obliges an employer to deduct tax from lump sum amounts before releasing the balance. The KRA Employers Guide confirms the obligation extends to compensation for termination of employment.

p. 3
02

Whether the learned Judge erred in directing the parties to involve KRA in assessing the tax payable

Holding

No. The direction was correct because KRA is the body charged with assessing and collecting revenue and enforcing revenue laws.

Reasoning

The parties disagreed on the assessment of P.A.Y.E due on the award. The Court held that KRA, being the body charged with the duty of assessing and collecting revenue and enforcing revenue laws, was well suited to assist and guide in the assessment of the tax payable, even though it was not a party to the suit.

p. 4
03

Whether the ground on auctioneer's fees could succeed on appeal

Holding

No, because payment of auctioneer's fees was not an issue before the trial court.

Reasoning

The Court found that the claim for auctioneer's fees, despite evidence of lawful execution, had not been raised before the trial court and therefore the ground of appeal failed.

p. 4

Legal principles established

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  • An award of the Employment and Labour Relations Court for wrongful termination, including the entire global award, is subject to statutory deductions, including P.A.Y.E
  • The employer's obligation to deduct income tax under Section 37 of the Income Tax Act applies to lump sum payments, including compensation for termination of employment, and applies even to employees whose services have been terminated
  • The Kenya Revenue Authority is well suited to assist and guide in the assessment of tax payable on a decretal award notwithstanding that it was not a party to the suit

Court orders

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  1. 1.Appeal dismissed with costs

Authorities

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Legislation

  • Employment ActSection 19(1)(f)
  • Employment ActSection 49(1) and 49(2)
  • Income Tax ActSection 3(1)
  • Income Tax ActSection 5(2)
  • Income Tax ActSection 37(1)

Cases cited (2)

  • Andrew Mukite Saisi vs. Tracker Group of Companies
    Industrial Cause No. 748 of 2011 (unreported)
  • Directline Assurance Co. Ltd vs. Jeremiah Wachira Ichaura
    [2016] eKLR
On appeal from
Employment and Labour Relations Court at Mombasa
ELRC No. 308 of 2013
Jurisdiction invoked
First appeal from the Employment and Labour Relations Court under the Court of Appeal's appellate jurisdiction

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, "Kioko Joseph (Suing as the legal representative of the Estate of Joseph Kilinda) v Bamburi Cement Ltd [2017] KECA 360 (KLR)", Case Analysis (2017). Civil Appeal No. 69 of 2016. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2017/360/eng@2017-06-22

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