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Court of AppealPartially AllowedCivil Appeal 311 of 2013· [2019] KECA 1066 (KLR)

Kenya Revenue Authority v Republic (Ex Parte: Fintel Ltd)

Court of Appeal
5 February 2019
William OukoW. OukoMAM.S. Asike-MakhandiaSKS. Gatembu Kairu
4,802 words in judgment
View original judgmentRead on Kenya Law Watch case
AI-assisted case brief
·~19 min to read original · ~4 min brief

The bottom line

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Kenya's Court of Appeal ruled that interest credited in company books counts as 'paid', so withholding tax applies even before money actually changes hands.

What this practically means

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Executive summary

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The Court of Appeal allowed the Kenya Revenue Authority's appeal against a High Court judicial review decision (Majanja J, 5 October 2012) which had quashed, by certiorari, the Commissioner's demand for withholding tax of Kshs 4,787,257 on interest Fintel Ltd had accrued and credited in its books in favour of its building contractor, China Jiangsu, without actually paying it. The controversy turned on the words 'paid' and 'upon payment' in sections 2 and 35 of the Income Tax Act. The High Court had adopted the ordinary-English meaning, holding that payment must actually occur before withholding tax applies. Reversing, the Court of Appeal held that interpretation must be contextual: the Act gives 'paid' a technical definition that expressly includes amounts 'credited', and the income tax regime is accrual-based under sections 3 and 10. By crediting the interest in its profit and loss account, the respondent reduced its chargeable income and obtained a benefit; the strict statutory definition therefore captured the credited amount, and payment is deemed made even where no money has passed. The word 'deduct' in section 35(5) is an accounting term denoting a book entry, not a physical act. The Commissioner's demand was thus intra vires and certiorari was inappropriate. On the final ground, the court, while finding no justification for the respondent abandoning the Local Committee process for judicial review, held the move excusable as it was in good faith and caused no prejudice. The High Court judgment was set aside with costs to the appellant in both courts. This decision binds subordinate courts and the High Court on the construction of 'paid' and 'upon payment' in withholding tax assessments.

Key legal issues

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01

Meaning of 'paid' and 'upon payment' in sections 2 and 35 of the Income Tax Act

Holding

The High Court erred by giving 'upon payment' a narrow ordinary-English meaning requiring delivery of money. The Act gives 'paid' a technical definition including 'credited', so accrued interest credited to the contractor was 'paid' and subject to withholding tax.

Reasoning

The court held interpretation must be contextual: the Act defines 'paid' to include 'distributed, credited, dealt with or deemed to have been paid'. The income tax regime is accrual-based (sections 3 and 10). By crediting the interest in its profit and loss account, the respondent reduced its taxable income and obtained a benefit, so the strict statutory definition captures the credited amount.

p. 7
02

Whether the Commissioner's demand for withholding tax was ultra vires

Holding

The demand was intra vires; certiorari was inappropriate because the decision was made within the mandate of the Income Tax Act under section 120.

Reasoning

Section 120 permits the appellant to inquire into accounts, assess tax and demand payment. Since the credited interest fell within the statutory definition of 'paid', the assessment was lawful and the High Court's quashing order was erroneous.

p. 9
03

Failure to exhaust alternative remedies before the Local Committee

Holding

Although the respondent's move to judicial review after filing a Notice of Appeal to the Local Committee lacked justification, it was excusable as done in good faith and without prejudice to the appellant.

Reasoning

The court agreed there was no justification for abandoning the Local Committee route, but declined to debar the respondent because the move was in good faith and caused no prejudice, consistent with Republic v Econet Wireless.

p. 9
04

Standard of appellate review

Holding

The appeal is by way of retrial under Rule 29(1)(a); the appellate court reconsiders the evidence and draws its own conclusions.

Reasoning

Citing Selle v Associated Motor Boat Co Ltd, the court restated that an appeal from the High Court is by way of retrial, subject to the disadvantage of not having seen or heard witnesses.

p. 5

Legal principles established

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  • Withholding tax under section 35 of the Income Tax Act is triggered 'upon payment', and 'paid' bears the technical statutory definition in section 2 which includes amounts credited; an accrued interest entry credited in the payer's books constitutes 'paid' for withholding tax purposes
  • The Income Tax Act is based on the accrual system; payment is deemed made even where no money has physically passed
  • The word 'deduct' in section 35(5) is an accounting term referring to a book entry, not a physical act
  • Taxing statutes must be construed contextually and as a whole, giving words their statutory technical meaning rather than ordinary colloquial meaning

Court orders

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  1. 1.The judgment of the High Court dated 5th October 2012 is set aside
  2. 2.Costs of the appeal awarded to the appellant
  3. 3.Costs in the High Court awarded to the appellant

Authorities

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Legislation

  • Income Tax Actsection 2
  • Income Tax Actsection 3(1)
  • Income Tax Actsection 10(1)
  • Income Tax Actsection 35(1)(e)
  • Income Tax Actsection 35(3)(f)
  • Income Tax Actsection 35(5)
  • Income Tax Actsection 86
  • Income Tax Actsection 120
  • Tax Procedures Actalternative statutory mechanisms
  • Constitution of KenyaArticle 47(2)
  • Court of Appeal RulesRule 29(1)(a)
  • Withholding Tax Rulestiming of deduction

Cases cited (24)

  • Inland Revenue Commissioners v Duke of Westminster
    [1936] A.C. 1; [1] 19 TC 490

    Fair and reasonable construction of Revenue Acts; no tax without clear words

  • Russel v Scott
    (1948) 2 ALL ER 5

    Subject not to be taxed unless words of taxing statute unambiguously impose the tax

  • Breen v Amalgamated Engineering Union
    (1971) QB 175, 191

    Duty to give reasons (relied on by Majanja J)

  • Singh v C, SARS
    2003 (4) SA 520 (SCA)

    Meaning of 'paid' in withholding tax context (cited by appellant)

  • Commissioner for South African Revenue Service v Brummeria Renaissance (Pty) Ltd and Others
    69 SATC 205

    Debt must be one the debtor is obliged to pay immediately (cited by appellant)

  • CIR v People's Stores (Walvis Bay) (Pty) Ltd
    52 SATC 9

    Withholding tax principles (cited by appellant)

  • Cactus Investments (Pty) Ltd v CIR
    61 SATC 43

    Withholding tax principles (cited by appellant)

  • Mjengo Ltd v Commissioner of Domestic Tax
    Civil Appeal No.85 of 2014

    Ejusdem generis rule in interpreting 'paid' (cited by appellant)

  • Mutanga Tea & Coffee Company Ltd v Shikara Ltd & Another
    Civil Appeal No.54 of 2014

    Exhaustion of alternative remedies (cited by appellant)

  • R v IEBC & Others Ex Parte the National Super Alliance
    Judicial Review No. 378 of 2017

    Exhaustion of statutory remedies (cited by appellant)

  • Minister of National Revenue v Wrights Canadian Ropes Limited
    (1947) AC 109 to 123

    Failure to explain a decision may attract judicial review censure (cited by respondent)

  • Padfield v Minister for Agriculture Fisheries and Food
    (1986) AC 977

    Arbitrary decision-making liable to judicial review (cited by respondent)

  • Selle & another v Associated Motor Boat Co. Ltd & others
    (1968) EA 123

    Appeal by way of retrial; appellate court re-evaluates evidence

  • Cimbria (EA) Limited v Kenya Revenue Authority
    (2017) eKLR

    'Upon payment' means 'paid' and not 'payable'

  • Republic v Kenya Revenue Authority & Another Ex parte Kenya Nut Company Limited
    [2014] eKLR

    Word 'upon payment' literally means 'paid'

  • Tanganyika Mine Workers Union v The Registrar of Trade Unions
    [1961] EA 629

    Strict construction of penal provisions

  • London County Council v Aylesbury Dairy Company Ltd
    [1899] 1 QB 106 at 109

    Strict construction of penal/enabling provisions

  • Muini vs R through Medical Officer of Health, Kiambu
    [2006] 1 KLR (E&L) 15

    Strict construction of penal provisions

  • RE Hardial Singh and Others
    [1976-80] 1 KLR 1090

    Strict construction of penal provisions

  • Vestey v Inland Revenue Commissioners
    [1979] 3 All ER 984

    Citizen cannot be taxed unless clearly designated by a taxing Act

  • Mangin v Inland Revenue Commissioner
    [1971] AC 739

    Ordinary meaning of words in tax statutes; approach avoiding injustice or absurdity

  • Reserve Bank of India v Peerless General Finance and Investment Co. Ltd
    1987 SCR (2) 1

    No word of a statute can be construed in isolation

  • The Engineers Board of Kenya v Jesse Waweru Wahome & others
    Civil Appeal No 240 of 2013

    Contextual construction of statutes

  • Republic v Econet Wireless Company (RE Kenya National Cooperatives Limited)
    (2004) 2 EA 28

    Good faith and absence of prejudice excuse non-exhaustion of remedies

On appeal from
High Court of Kenya at Nairobi
J.R Misc. Application No.1768 of 2004
Jurisdiction invoked
First appellate jurisdiction under the Court of Appeal Rules (Rule 29(1)(a) cited); appeal from High Court judicial review decision

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, "Kenya Revenue Authority v Republic (Ex Parte: Fintel Ltd)", Case Analysis (2019). Civil Appeal 311 of 2013. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2019/1066/eng@2019-02-05

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