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Court of AppealDismissedCivil Appeal No. 213 of 2018· [2020] KECA 949 (KLR)

Kenya Revenue Authority v Kenya Bankers Association

Court of Appeal
24 January 2020
William OukoW. OukoHOHannah OkwenguFSF. Sichale
3,556 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 banks selling repossessed land do not owe the seller's Capital Gains Tax; that burden stays with the original owner.

What this practically means

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Executive summary

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The Court of Appeal (Ouko, P, Okwengu and Sichale, JJA) dismissed the Kenya Revenue Authority's appeal against an High Court judicial review ruling by Odunga, J (13 March 2018) which had quashed, by declaration and mandamus, the KRA's directive twinning the online payment of Stamp Duty and Capital Gains Tax. The central question was whether a chargee exercising its statutory power of sale is obligated to pay CGT. The court held that a chargee is a proprietor of the charge only, not of the charged land: sections 2 and 56(5) of the Land Registration Act and sections 80 and 98 of the Land Act confirm a charge operates as security only and does not transfer ownership, and under paragraph 5(2) of the Eighth Schedule to the Income Tax Act the chargee deals with the property as nominee of the chargor. CGT is a tax on the income of a person, and liability presupposes an established gain; the chargor, not the chargee or purchaser, bears it unless a surplus renders the chargee a trustee. Section 101 of the Land Act applies only to purchase money actually received, so the KRA could not demand tax on monies not yet received. The court further held that the unilateral twinning directive, imposed without hearing affected parties, violated Article 47 of the Constitution and section 4 of the Fair Administrative Action Act. The appeal was dismissed with costs, affirming the decision below.

Key legal issues

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01

Status of a chargee exercising statutory power of sale

Holding

A chargee is proprietor of the charge only, not of the land; it executes the transfer as a nominee and never steps into the shoes of the owner

Reasoning

The court read section 2 of the Land Registration Act and sections 80 and 98 of the Land Act together: a charge has effect as security only and does not operate as a transfer. Paragraph 5(2) of the Eighth Schedule to the Income Tax Act treats the chargee's dealings as nominee dealings of the chargor, subject to the security, confirming the chargee's interest is confined to the sum secured.

p. 3
02

Liability for CGT on a chargee's statutory power of sale

Holding

CGT is payable by the chargor upon registration of the transfer, not by the chargee or purchaser, unless a surplus makes the chargee a trustee for the chargor

Reasoning

Sections 3(1) and 3(2)(f) of the Income Tax Act and paragraphs 2 and 4(1) of the Eighth Schedule show CGT is charged on the income (gain) of a person. A gain must be established before liability arises. The chargee, acting as nominee, does not derive taxable income of its own from the forced sale.

p. 5
03

Application of section 101 of the Land Act

Holding

Section 101 governs application of purchase money after receipt and does not impose prospective CGT liability on a chargee

Reasoning

The provision operates on money 'received' by the chargee after exercising the power of sale. Demanding CGT before the sale proceeds are received is improper, since the sale might not proceed as expected. The court also agreed section 19 of the Land Act, referring to taxes on the charged land, was inapplicable.

p. 4
04

Fairness of the KRA's administrative action twinning CGT and Stamp Duty

Holding

The unilateral decision to require simultaneous payment of CGT and Stamp Duty was unfair and irregular for want of procedural fairness

Reasoning

Article 47 of the Constitution and sections 4(1) and (2) of the Fair Administrative Action Act guarantee expeditious, efficient, lawful, reasonable and procedurally fair administrative action and written reasons. The respondents' members were not given an opportunity to present their views before the twinning directive was imposed.

p. 5

Legal principles established

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  • A chargee exercising its statutory power of sale does not become the owner or proprietor of the land, only of the charge, and is not obligated to pay the chargor's Capital Gains Tax
  • Capital Gains Tax is a tax on the income of a person, not a tax on land, and liability requires establishment of an actual gain
  • Section 101 of the Land Act applies purchase money only after it is received; a tax authority cannot demand taxes from monies not yet received by a chargee
  • A unilateral administrative decision taken without affording affected persons an opportunity to be heard is unfair and irregular contrary to Article 47 of the Constitution and section 4 of the Fair Administrative Action Act

Court orders

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  1. 1.Appeal dismissed with costs

Authorities

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Legislation

  • Constitution of Kenya, 2010Article 47(1) and (2)
  • Income Tax Act (Cap 470)Section 3(1)
  • Income Tax Act (Cap 470)Section 3(2)(f)
  • Income Tax Act (Cap 470)Section 15(3)(f)
  • Income Tax Act (Cap 470)Eighth Schedule, paragraph 2
  • Income Tax Act (Cap 470)Eighth Schedule, paragraph 4(1)
  • Income Tax Act (Cap 470)Eighth Schedule, paragraph 5(2)
  • Land Act, 2012Section 2 (definition of charge)
  • Land Act, 2012Section 19
  • Land Act, 2012Section 80(1)
  • Land Act, 2012Section 92
  • Land Act, 2012Section 98(3) and (4)
  • Land Act, 2012Section 101
  • Land Registration Act, 2012Section 2 (definition of proprietor)
  • Land Registration Act, 2012Section 56(5)
  • Fair Administrative Action Act, 2015Section 4(1) and (2)
  • Finance Act, 2014re-introduction of CGT effective 1st January 2015

Cases cited (2)

  • Selle & Another vs Associated Motor Boat Company Limited & others
    [1968] E.A 123

    First appeal is by way of re-trial; appellate court re-evaluates evidence while making allowance for not having seen or heard witnesses

  • Abdul Hameed Saif –vs- Ali Mohamed Sholan
    (1955) 22 EACA 270

    Appellate court not bound by trial judge's findings of fact where he failed to account for particular circumstances or probabilities

On appeal from
High Court of Kenya at Nairobi
H.C. Misc. Civil Application No. 510 of 2017
Jurisdiction invoked
First appeal to the Court of Appeal from the High Court (judicial review), pursuant to the Court's appellate mandate as stated in Selle & Another v Associated Motor Boat Company Ltd & others [1968] E.A 123

Key timeline

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Practical implications

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Frequently asked questions

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Later judgments citing this (1)

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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 Kenya Bankers Association", Case Analysis (2020). Civil Appeal No. 213 of 2018. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2020/949/eng@2020-01-24

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