This case, TAT Appeal No. E768 of 2023, involved Hemingways Watamu Limited (the appellant), a hotel and safari business, disputing tax assessments issued by the Commissioner of Domestic Taxes (the respondent).
“An iconic tropical paradise on the Kenyan coast sitting right in the middle of the pristine Watamu Marine National Park with its idyllic white sand beach and turquoise waters. The exceptional personal service and sincere charm of this established hotel has come to represent Kenyan coastal luxury to so many travellers for close to 30 years.”
The assessments, issued in June 2023, covered the period between 2017 and 2021 and included Value Added Tax (VAT) and income tax loss adjustments. Hemingways, dissatisfied with the assessment, filed an objection on July 26, 2023, contesting both the amounts and the respondent’s application of the law, particularly regarding investment deductions and disallowed costs.
The main issues of contention included Hemingways’ claim of a 150% investment deduction on a hotel construction project in Watamu, worth USD 7.4 million, and the disallowance of construction-related costs amounting to USD 4.m for 2018 and USD 41,000 for 2019. The respondent argued that the applicable investment deduction rate was 100%, not 150% and that several costs claimed by Hemingways should not have been allowed, as they either qualified for wear and tear allowances or were not sufficiently documented.
Hemingways raised several legal objections, including that the respondent failed to provide its objection decision within the mandatory 60-day period required under Section 51(11) of the Tax Procedures Act (TPA), and that some assessments for 2017 were made beyond the 5-year limit provided in the TPA Section 31(4)(b). Hemingways also claimed that the disallowed construction costs formed part of the building as defined in the Second Schedule of the Income Tax Act, qualifying them for the investment deduction.
The tribunal sided with Hemingways on key issues, noting that the 150% investment deduction was indeed allowable under the Second Schedule Paragraph 24(1)(f) of the Income Tax Act for projects outside Nairobi, Mombasa, and Kisumu with investments exceeding Kshs. 200 million. The tribunal referenced its decision in TAT Appeal No. 332 of 2019, CKL Africa Limited vs. Commissioner of Domestic Taxes, and the subsequent High Court ruling in Income Tax Appeal E050 of 2022, which affirmed the 150% deduction for qualifying projects.
CKL Africa Limited had constructed a building and installed machinery at Tatu City , a location outside Nairobi. The company claimed an investment deduction of 150% on their capital expenditure for the construction of the building and installation of machinery, based on Paragraph 24(1)(f) of the Second Schedule of the Income Tax Act (ITA). This provision allowed a 150% deduction for capital expenditures incurred outside Nairobi, Mombasa, or Kisumu, where the value of the investment exceeded USD 1.5 million.
The revenue authority, disputed this claim, arguing that the applicable investment deduction rate was 100%, not 150%. The respondent’s position was that CKL Africa was not entitled to the enhanced rate as the construction did not meet the necessary criteria for the higher deduction.
The Tax Appeals Tribunal (TAT) ruled in favor of CKL Africa Limited. The tribunal’s key findings were:
- Location and Investment Size: The tribunal found that CKL Africa’s building was constructed in Tatu City, Ruiru, which is outside the City of Nairobi and thus qualified geographically for the enhanced investment deduction. The total cost of the investment exceeded USD 1.5 million, satisfying the financial threshold outlined in the Income Tax Act.
- Eligibility for 150% Investment Deduction: The tribunal held that CKL Africa was entitled to the 150% investment deduction under Paragraph 24(1)(f) of the Second Schedule to the Income Tax Act. The tribunal reasoned that the law applied to capital expenditures on both buildings and machinery installed outside the specified major cities (Nairobi, Mombasa, and Kisumu), and CKL Africa had met these conditions.
- First Use of the Building and Machinery: The tribunal also noted that CKL Africa’s building and machinery were used in the year of income when the deduction was claimed, further affirming the company’s eligibility for the higher deduction rate.
Regarding the objection’s timeliness, the tribunal found that although the respondent issued its objection decision on October 5, 2023, it did so within the statutory 60-day period starting from August 9, 2023, when Hemingways validated its objection by paying the undisputed tax amount. As such, the respondent was within the legal timeframe.
The tribunal also ruled in favour of Hemingways on the matter of disallowed construction costs, determining that expenses such as labour, air conditioning, and electrical works were allowable under the Income Tax Act as part of the hotel building. The respondent’s disallowance of these costs was deemed incorrect.
In conclusion, the tribunal allowed the appeal, set aside the respondent’s objection decision, and ordered that each party bear its own costs. Hemingways was successful in maintaining its 150% investment deduction and reclaiming the disallowed construction costs.
In TAT Appeal No. E768 of 2023, several cases were cited to support the arguments made by both Hemingways Watamu Limited (the appellant) and the Commissioner of Domestic Taxes (the respondent). These cases were used to interpret tax law provisions, procedural requirements, and the rights of taxpayers. The key cases cited in the appeal include:
1. Republic vs. Kenya Revenue Authority Ex Parte M-Kopa Kenya Limited [2018] eKLR
This case was cited by the appellant to support their argument regarding the timelines for issuing an objection decision. The court in this case ruled that if the Kenya Revenue Authority (KRA) fails to make a decision within the statutory 60-day period provided under Section 51(11) of the Tax Procedures Act (TPA), the objection is deemed to be allowed. This ruling was used to argue that the respondent’s failure to act within the statutory period meant the objection should be considered as allowed.
2. Digital Box Limited vs. Commissioner of Investigation and Enforcement [2019] eKLR
The respondent referred to this case to justify their assessment based on the best judgment principle. The court in this case held that the Commissioner of Domestic Taxes is empowered by the Tax Procedures Act to use the best information available and judgment in making tax assessments when the taxpayer fails to provide adequate documentation or information. This supported the respondent’s claim that their assessment of Hemingways Watamu’s taxes was justified under this principle.
3. Osho Drapers Limited vs. Commissioner of Domestic Taxes [2022] eKLR
The respondent also cited this case to support the claim that the Tax Procedures Act grants the Commissioner the authority to request additional information and to adjust assessments based on available information. This case was used to argue that the assessments made against Hemingways Watamu were legally valid because the Commissioner had the power to request more information and issue revised assessments accordingly.
4. Commissioner of Domestic Taxes vs. Galaxy Tools Limited [2021] eKLR
This case reinforced the Commissioner’s right to request for additional documentation and information to satisfy themselves about the taxpayer’s taxable income and compliance. The court in this case upheld the powers of the KRA under the Tax Procedures Act to request detailed records from taxpayers. This case was cited to counter the appellant’s claim that sufficient documentation had already been provided.
5. CKL Africa Limited vs. Commissioner of Domestic Taxes (TAT Appeal No. 332 of 2019)
This case was cited as a precedent by Hemingways Watamu Limited to support their claim for the 150% investment deduction. In this earlier case, the Tax Appeals Tribunal ruled in favour of CKL Africa Limited, allowing the 150% investment deduction for a project outside Nairobi, Mombasa, and Kisumu. This was pivotal in Hemingways argument that their investment deduction claim at 150% was valid. At the High Court: Commissioner of Domestic Taxes vs. CKL Africa Limited [High Court Income Tax Appeal E050 of 2022].