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Court of AppealPartially AllowedCivil Appeal (number not stated in judgment)

Fleur Investments Limited v Commissioner of Domestic Taxes & another (Civil Appeal 158 of 2017) [2018] KECA 341 (KLR)

Court of Appeal of Kenya
20 April 2018
AVAlnashir VisramWKW. KaranjaMartha Karambu KoomeM. K. Koome
5,506 words in judgment
View original judgmentRead on Kenya Law Watch case
AI-assisted case brief
·~22 min to read original · ~4 min brief

The bottom line

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Kenya's Court of Appeal cancelled a KES 656 million tax demand, ruling that KRA cannot impose arbitrary figures without any rational basis.

What this practically means

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Executive summary

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Fleur Investment Company, a property developer and landlord, was assessed by the Commissioner for Domestic Taxes in June 2015 for approximately Ksh.656 million in corporation tax, VAT, penalties and interest for the years 2008 to 2012, based on estimated 'banking income'. This followed a compliance audit covering 2010-2014 in which the appellant's books were examined and found satisfactory, after which a tax compliance certificate had been issued. The appellant sought judicial review in the High Court seeking certiorari and prohibition; the learned Judge struck out the motion with costs, holding that the issues were merit-based and belonged before the Income Tax Appeals Tribunal. The Court of Appeal allowed the appeal. It held that although a statutory alternative remedy normally forecloses judicial review, exceptional circumstances existed here: the assessment was premised on a demonstrably false basis (that the appellant had refused to submit to audit when the audit had taken place and a certificate issued), the revenue authority took irrelevant matters into account and ignored relevant ones, and no rational explanation was given for the figures demanded, which were 'plucked from the air'. That was Wednesbury unreasonableness, bad faith and ultra vires conduct, amenable to judicial review notwithstanding the tribunal regime. The Court also held the Judge misdirected himself in requiring an objector to attach documents already in the authority's custody, and misapprehended the facts in treating the dispute as merit-based. It set aside the ruling of 25th January, 2017 and granted certiorari quashing the assessment and demand, and prohibition against implementing them, with each party bearing its own costs in both courts.

Questions the Court framed

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The issues the Court set itself to decide, in its own words.

  1. 1.Whether the High Court had jurisdiction to entertain the judicial review motion notwithstanding the existence of the Income Tax Appeals Tribunal and the appellant's pending appeal before it
  2. 2.Whether section 9(4) of the Fair Administrative Action Act and the exceptional-circumstances exception in Speaker of National Assembly v Njenga Karume justified recourse to judicial review instead of the statutory tribunal process
  3. 3.Whether the impugned tax assessment was ultra vires, arbitrary, capricious and in Wednesbury unreasonableness, justifying certiorari and prohibition
  4. 4.Whether the learned Judge misdirected himself in holding that a valid objection must be accompanied by supporting documents even where the originals were in the respondents' custody
  5. 5.Whether the Court should interfere with the learned Judge's discretionary decision to strike out the Notice of Motion

Key legal issues

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01

Forum: judicial review versus the specialised statutory tax tribunal

Holding

The High Court had jurisdiction to hear the judicial review motion because the case presented exceptional circumstances outside the ambit of the Income Tax Tribunal, namely arbitrariness, bad faith and Wednesbury unreasonableness by the revenue authority.

Reasoning

The Court reaffirmed Speaker of National Assembly v Njenga Karume: where a statutory alternative remedy exists, judicial review is granted only in exceptional circumstances. Here the assessment was premised on an erroneous state of facts (claiming the appellant had refused an audit that had in fact taken place and yielded a compliance certificate), evidencing bad faith and arbitrariness. Such abuse of statutory power is not a merits dispute for the tribunal and cannot be left to a body allegedly riding roughshod over citizens' rights; the court as bastion of justice must intervene.

p. 7
02

Wednesbury unreasonableness of the tax assessment

Holding

The assessment was Wednesbury unreasonable and ultra vires: it was based on an erroneous factual premise, took into account irrelevant matters and failed to consider relevant ones, with no rational explanation for the figures demanded.

Reasoning

The respondents assessed Ksh.656,372,183 based on estimated 'banking income', asserting the appellant had failed to submit to audit and provide documents, yet the audit had occurred, documents were availed, and a compliance certificate issued. The claim that they only later discovered the appellant was a landlord was contradicted by their own email of 21st June, 2013. No explanation was given for the figures, which were 'plucked from the air', demonstrating arbitrariness, capriciousness and bad faith.

p. 7
03

Interpretation of the proviso to section 84 of the Income Tax Act on supporting documents for objections

Holding

The learned Judge's finding that an objection must always be accompanied by supporting documents, even where already filed with the authority, was an obiter misdirection; the words 'where applicable' mean the proviso applies only where documents were not previously filed.

Reasoning

The revenue authority, having received all tax records, bears responsibility for their safe custody and cannot penalise a taxpayer for not re-attaching documents already in its possession. A taxpayer needing to refer to such documents should obtain certified copies from the authority, not the other way round. Penalising the appellant on that basis was high handed and unacceptable.

p. 6
04

Interference with the trial Judge's discretion in striking out the motion

Holding

The Court interfered because the learned Judge misapprehended the facts in treating the issues as merit-based when the assessment was ultra vires, null and void.

Reasoning

Applying the settled principles in United India Insurance Co Ltd v East African Underwriters, an appellate court may interfere where the judge misdirected himself on law, misapprehended the facts, took into account irrelevant or failed to consider relevant matters, or where the decision was plainly wrong. Since the assessment on which all issues were premised was ultra vires, the Judge's conclusion that the issues were merit-based was a misapprehension of facts justifying intervention.

p. 9

Legal principles established

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  • Jurisdiction must be established as a condition precedent before a court can issue any valid judgment or order; without jurisdiction a court has no power to take one more step
  • A taxing authority is not entitled to impose a tax demand without a rational basis; an arbitrary assessment plucked from the air is an unreasonable exercise of statutory power justifying judicial intervention
  • Statutory powers may only be exercised validly if exercised reasonably, not arbitrarily or in bad faith, and courts may intervene where arbitrariness, malice, capriciousness or breach of natural justice is manifest even where a specialised tribunal exists
  • Where a taxpayer's records and documents have been submitted to and are in the custody of the revenue authority, the taxpayer is entitled to obtain certified copies from the authority rather than being penalised for failing to re-attach them; the authority cannot shirk its duty of safe custody
  • Imposing taxes where none is lawfully owed, and arbitrarily imposing sanctions to enforce payment, is acting in excess of jurisdiction, ultra vires and amenable to judicial review notwithstanding the tribunal regime

Court orders

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  1. 1.Set aside the impugned Ruling dated 25th January, 2017 striking out the appellant's Notice of Motion dated 18th December, 2015
  2. 2.An order of certiorari quashing the decision of the respondents contained in the assessment and letter of demand dated 29th June, 2015 and 14th September, 2015 directing the applicant to remit amounts totalling Ksh.656,372,183 and Ksh.644,342,189 respectively and all consequential orders arising therefrom
  3. 3.An order of prohibition restraining the respondents from implementing and effecting the assessment and demand as contained in the assessment and letter of demand dated 29th June, 2015 and 14th September, 2015 respectively
  4. 4.Each party to bear its own costs both in the appeal and before the High Court

The bench

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One judgment of the whole court — no separate or dissenting opinions.

AV
majority
WK
majority
Martha Karambu Koome
M. K. KoomeJA
Currently serving
majority
On appeal from
High Court of Kenya
Judicial Review Notice of Motion dated 18th December, 2015 (ruling dated 25th January, 2017)
Jurisdiction invoked
Appeal to the Court of Appeal under its appellate jurisdiction; the underlying motion was a judicial review motion under Order 53 Rules 1, 2 & 4 of the Civil Procedure Rules, 2010, Sections 8 and 9 of the Law Reform Act and Section 11 of the Fair Administrative Action Act, 2015

Relief refused

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Determination of the ground on legitimate expectation

Having found the assessment ultra vires and granted judicial review remedies, the Court found it unnecessary to consider the legitimate expectation ground

p. 9

Costs

An order that each party bears its own costs both here and before the High Court.

Quotable passages

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Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.

We allow the same and set aside the impugned Ruling dated 25th January, 2017 striking out the appellant's Notice of Motion dated !8th December, 2015, and consequently grant the following orders:
p. 9Final orders - appeal allowed and High Court ruling set aside
An order of certiorari quashing the decision of the respondents contained in the assessment and letter of demand dated 29th June, 2015and 14th September ,2015 directing the applicant to remit an amount totalling Ksh.656,372,183 and Ksh.644,342,189 respectively and all consequential orders arising therefrom.
p. 9Certiorari quashing the tax assessment and demand
An order of prohibition restraining the respondents from implementing and efiecting the assessment and demand as contained in the assessment and letter of demand dated 29th June, 2015 and 14th September, 2015 respectively.
p. 9Prohibition against implementing the assessment
An order that each party bears its own costs both here and before the High Court.
p. 9Costs order
A taxing authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure.
p. 7Limits on taxing authority - rational basis required
Jurisdiction is everything. Without it, a court has no power to make one more step.
p. 6Jurisdiction as a condition precedent
it is axiomatic that statutory power can only be exercised validly if exercised reasonably and not arbitrarily or in bad faith.
p. 7Reasonable exercise of statutory power

Issues in the judgment

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minor

The amount in the certiorari order (Ksh.644,342,189 for the letter of demand of 14th September, 2015) differs from the Ksh.656,372,183 described earlier as the assessment figure, and the judgment does not explain the variance.

minor

The date of the Notice of Motion is printed inconsistently: the substantive judgment uses '18th December, 2015' while the final orders use '!8th December, 2015'.

Key timeline

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Practical implications

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Frequently asked questions

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Later judgments citing this (7)

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Judgments in the corpus that rely on this one. Where the Court said how it treated the authority, that is shown.

Cite this brief

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Cite this brief

Caselaw, "Fleur Investments Limited v Commissioner of Domestic Taxes & another (Civil Appeal 158 of 2017) [2018] KECA 341 (KLR)", Case Analysis (2018). Civil Appeal (number not stated in judgment). Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2018/341/eng@2018-04-20

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