African Research Collaboration for Health Limited v Commissioner of Domestic Taxes [2024] KETAT 1426 (KLR) | Income Tax Exemption | Esheria

African Research Collaboration for Health Limited v Commissioner of Domestic Taxes [2024] KETAT 1426 (KLR)

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African Research Collaboration for Health Limited v Commissioner of Domestic Taxes (Tax Appeal E313 of 2023) [2024] KETAT 1426 (KLR) (27 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1426 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E313 of 2023

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

September 27, 2024

Between

African Research Collaboration for Health Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a company limited by guarantee duly incorporated in Kenya and whose business is to conduct, facilitate, support, promote foster develop and assist the research into, study education, and dissemination of, and application of knowledge and information concerning, health and biomedical sciences in all its aspects.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. On 29th March, 2019 the Appellant submitted a manual income tax exemption application for consideration by the Respondent. In compliance with the instructions of the Respondent’s officer, the application was re-submitted manually and on the i-Tax platform on 16th May, 2022 and 13th June, 2022 respectively.

4. On 10th May, 2023 the Respondent issued a decision rejecting the Appellant’s application.

5. Aggrieved by the Respondent's decision to reject its application, the Appellant lodged its Notice of Appeal on 9th June, 2023.

The Appeal 6. The Appeal as contained in the Memorandum of Appeal filed on 19th June, 2023 is premised on the following grounds:i.That the Respondent erred in rejecting the Appellant’s application for income tax exemption and concluding that the Appellant’s activities were not aligned with the provisions of Paragraph 10 of the First Schedule to the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”).ii.That the Respondent failed to recognize that granting of an exemption under Paragraph 10 of the First Schedule to the ITA is mandatory once the applicant has complied with all the requirements of that provision.iii.That the Respondent’s decision did not provide specific reasons for rejecting the Appellant’s application thereby violating the Appellant’s Constitutional right to fair administrative action.

The Appellant’s Case 7. The Appellant set out its case in its Statement of Facts filed on 19th June, 2023. Pursuant to an Application dated 2nd February, 2024, the Appellant was granted leave to file a further bundle of documents in support of its statement of facts. In addition, the witness statements of Ms. Mary Muthomi, financial officer of the Appellant and Ms. Esther Kariuki, the financial accountant of the Appellant were both admitted as evidence in chief on 23rd July, 2024. The Appellant stated as follows in its statement of facts:

8. That in 1964, Wellcome Trust, (hereinafter “the Trust”) entered into an agreement with the Government of Kenya (hereinafter “GoK”) to conduct scientific medical research in Kenya and then again in 1989, in pursuance of the said Agreement with GoK, it entered into an Agreement with Kenya Medical Research Institute (hereinafter “KEMRI”) and the Oxford University to promote high quality biomedical research in Kenya.

9. The Agreement and co-operation led to the creation of the KEMRI Wellcome Trust Research Programme (hereinafter “the Program”) which was run under the Wellcome Trust Research Laboratories on a ‘not for profit’ basis.

10. The Appellant stated that the Program is based within KEMRI Centre for Geographic Medical Research (hereinafter “the Centre”) which is next to the Kilifi County Hospital. The Centre was established in 1985 as a result of Collaboration between KEMRI and the Wellcome Trust. The Program’s core activities are funded by the Wellcome Trust through grants to the Appellant as part of co-operation between the Trust and GoK. The Program conducts epidemiological, social, laboratory and clinical research with results feeding into local and international health policy.

11. The Appellant further stated that in 2015, the Board of Wellcome Trust and th Council of Oxford University requested that the legal and governance structure for the Program be modernized and made fit for purpose and as a result, the Appellant was created with the intention that the Program would continue with its research work under the same agreements with Oxford University and Wellcome Trust UK; as well as the Agreements between the Trust and the GoK.

12. The Appellant went on to analyse its grounds of Appeal as follows:

(I) The Respondent erred in rejecting the Appellant’s application for income tax exemption and erroneously concluded that the Appellant’s activities were not aligned with the provisions of Paragraph 10 of the First Schedule to the Income Tax Act Cap 470. 13. The Appellant’s stated that its activities are funded through grants made possible by the generosity of the Wellcome Trust among other donors and that the research is conducted in conjunction with GoK support through concessions provided in various agreements with GoK.

14. The Appellant further stated that the grants are advances at the beginning of the Programme funding cycles, usually 5-year period and that the current grant of GBP 45 million covers the period 2016 to 2021 and was advanced to the Program at the commencement of the period and extended for a further 2 years to 30th September, 2023 with an expectation of renewed funding from Wellcome Trust on a 7 yearly cycle going forward. When the amount is deposited in the bank account, the deposited amount earns interest which is the income taxable at the corporation tax rate.

15. The Appellant’s application sought exemption of interest income from tax on the following basis:a.The Appellant is a not for profit entity and its activities are charitable and not for profit. The interest income earned on unutilized grants is incidental to its activities which are meant to compensate for expected impact of inflation on future activities.b.It was not the intention of the agreement between the Appellant and GoK to have any grant used in paying any taxes. This is embodied in the concessions granted in the agreements.c.Payment of taxes in relation to the income of the Appellant diverts much needed funds from the medical research and wellness activities of the Program.d.The Application was also in consideration of the work the Appellant carries out towards academic research, alleviation of suffering through contribution to medical research and wellness in Kenya. The work was beneficial to Kenya and East and Central African region as a whole.

16. The Appellant stated that in spite of its elaborate description of the nature of its work as contained in its application, for exemption, the Respondent rejected its application on the sole ground that “the taxpayer’s activities and objectives are not aligned with Paragraph 10 of the first schedule of the ITA”.

17. The Appellant, buttressed its position by citing Paragraph 10 of the First Schedule to the ITA which provides as follows:“Subject to section 26, the income of an institution, body of persons or irrevocable trust, of a public character established solely for the purposes of the relief of the poverty or distress of the public, or for the advancement of religion or education –a.established in Kenya; orb.whose regional headquarters is situated in Kenya, in so far as the Commissioner is satisfied that the income is to be expended either in Kenya or in circumstances in which the expenditure of that income is for the purposes which result in the benefit of the residents of Kenya:Provided that any such income which consists of gains or profits from a business shall not be exempt from tax unless those gains or profits are applied solely to those purposes and either -i.the business is carried on in the course of the actual execution of those purposes; orii.the work in connexion with the business is mainly carried on by beneficiaries under those purposes; oriii.the gains or profits consist of rents (including premiums of similar consideration in the nature of rent) received from the leasing or letting of land and chattels leased or let therewith. and provided further that an exemption under this paragraph –“ (A) shall be valid for a period of five years and may be revoked by the Commissioner for any just cause; and (B) shall where an applicant has complied with all the requirements of this paragraph be issued within sixty days of lodging of the application.”

18. The Appellant averred that Paragraph 10 of the First Schedule to the ITA provides the basis upon which a request for exemption of income tax is deemed to be valid and that based on the facts presented in its income tax exemption application it was clear that it was an institution of a public character established solely for the purposes of the relief of poverty or distress of the public and for the advancement of education.

19. The Appellant stated that the work undertaken by it for the advancement of biomedical research programs and whose grant income is applied solely for charity also established it as an institution solely for the relief of poverty and distress of the public in a manner that resulted in obvious benefit to the residents of Kenya pursuant to Paragraph 10 to the First Schedule to the ITA. The Appellant reiterated that the character, activities and benefits of the trust qualified for exemption under the said provision.

20. The Appellant went on to analyze the areas it identified as being key for consideration when deciding to allow an application under Paragraph 10 namely:

i. The Justification of establishment 21. The Appellant’s view was that paragraph 10 of the First Schedule to the ITA requires that the organization seeking exemption ought to be established in Kenya or whose regional headquarters are situated in Kenya. The Appellant asserted itself in stating that it had demonstrated that it was established in Kenya and adduced as evidence its Certificate of Registration. The Appellant reiterated that as far as jurisdiction was concerned, it qualified for exemption.

ii. The Character of the Institution 22. The Appellant stated that the provisions of paragraph 10 of the First Schedule to the ITA require that the institution body of persons or irrevocable trust must be of a public character and established solely for the purposes of relief of the poverty or distress of the public or for the advancement of religion or education.

23. The Appellant averred that it is an institution of public character because it was established for the sole objective of conducting, facilitating and supporting, to promote , foster, develop and assist the research into studying the health for the public good and also biomedical science for the public good, education on public health and dissemination of and application of knowledge and information concerning public health and biomedical sciences in all its aspects for the good of the public and general population of the people of Kenya and the world. The Appellant went on to elaborate this character as follows:a.Advancing medicine to protect the public against diseaseThe Appellant stated that its research is aimed to better understand immunity to malaria, bacterial and viral diseases which affect the public. This feeds into participation in large trials of a range of new vaccines to protect children from some cause of disease and death. The Program established a unique long-term picture of population health in Kilifi County through a platform linking clinical events with high quality laboratory data and demographic surveillance of a population of nearly 300,000. These activities are of a public character fitting into the requirement for an exemption under the ITA.b.Generating advancement of national and international policy for the public goodThe Appellant conducts intervention trials against malaria that have fed directly into a national and international policy which has contributed to the prevention of deaths, a direct benefit to the public. Their activities include trials of treated bed nets, the prevention of malaria in pregnant women, interventions to improve community-based treatment and interventions to increase access to safe effective drugs. Further activities included clinical testing of an Ebola vaccine, research on the spread of COVID that informed national policy, research on policy initiatives to achieve universal health coverage and social science research to promote ethical conduct in science. This, according to the Appellant satisfies the requirement of activities supporting the public good.c.Building Capacity for the public good.The Appellant stated that it develops new approaches to building capacity and leadership in Kenya by attracting the brightest graduates as paid interns, Masters and PhD students and providing the infrastructure for them to develop their careers as researchers. Researchers trained through the Program have won international recognition and had gone on to lead research groups in many institution in Kenya and the region.

iii. The Purpose of the Institution 24. The Appellant stated that Paragraph 10 of the First Schedule to the ITA provides that the institution or body corporate must be established solely for the purpose of the relief of poverty, distress of the public or for advancement of religion or education.

25. The Appellant further averred that it is established for the sole purpose of supporting education in line with the advancement of education. Similarly, its role in dissemination of and application of knowledge and information concerning health and biomedical sciences satisfied the requirement of relief of poverty and relief from the distress of disease.

26. The Appellant went on to indicate that its Memorandum of Association stated as follows at paragraph 3:“The main purpose of the company shall be to conduct, facilitate, support, promote, foster, develop and assist the research into, study, education and dissemination of, and application of knowledge an information concerning, health and biomedical sciences in all its aspects.”

27. The Appellant stated that ultimately the purpose as outlined in its Memorandum of Association combats poverty and any suffering within the society from the distress of disease and lack of knowledge and that in turn, this meets the purpose of advancement of education.

iv. The Income of the Applicant must be expended in Kenya or for the benefit of the residents in Kenya 28. The ITA provides that the income in question of an Applicant (person applying for exemption) must be expended in Kenya or for the benefit of the residents of Kenya. According to the Appellant, the documents it provided confirmed the fact that all incomes it derives are expended wholly in line with its objects which were geared towards benefitting Kenyan residents. This was also enshrined at paragraph 5 of its Memorandum of Association which stated the following;“The Income and property of the Company whencesoever derived shall be applied solely toward the promotion of the objects of the Company as set forth in this Memorandum of Association; and no portion thereof shall be paid or transferred directly or indirectly, by way of dividend, gift, division, bonus or otherwise howsoever by way of profit; to the members of the Company.”

29. The Appellant was of the view that it was bound by law to confine itself within the letter of its Memorandum and Articles of Association, and this was evidence to support the fact that it had met all the requirements of Paragraph 10 of the First Schedule to the ITA.

(II) The Respondent failed to recognize that the granting of an exemption under Paragraph 10 of the First Schedule to the ITA is mandatory once the applicant has complied with all the requirements of that provision 30. The Appellant stated that Respondent failed to recognize that the granting of an exemption under Paragraph 10 of the First Schedule of the ITA, is mandatory once the applicant has complied with all the requirements of that provision.

31. The Appellant averred that the income it receives does not fall within the definition of chargeable income and relied on Section 13 of the ITA as read together with Part I of the First Schedule of the ITA, which provides for certain income exempt from tax, and states as follows;“13. Certain income exempt from tax, etc1. Notwithstanding anything in Part II, the income specified in Part I of the First Schedule which accrued in or was derived from Kenya shall be exempt from tax to the extent so specified.2. The Minister may, by notice in the Gazette, provide—a.that any income or class of income which accrued in or was derived from Kenya shall be exempt from tax to the extent specified in such notice…”

32. The Appellant stated that the Respondent failed to appreciate that from a reading of Section 13 of the ITA, the words thereof are couched in mandatory terms, which means that as long as a taxpayer meets the conditions of that provision, then the granting of the exemption is mandatory in accordance with the law and that further, upon a reading of Paragraph 10 of the First Schedule to the ITA, the further proviso under the paragraph reads as follows;“And provided further that an exemption under this paragraph – (B) shall, where an applicant has complied with all the requirements of this paragraph, be issued within sixty days of the lodging of the application.”

33. The Appellant averred that it is trite law that when the ‘shall’ is used in a statute, then the terms of that provision are deemed to be couched in mandatory terms. For these reasons, the Respondent’s decision was flawed to the extent of being unlawful. The word ‘shall’ demonstrates the intention of the legislature that provision must be given an obligatory or a directory meaning without room for discretion, once it is established as a matter of fact and evidence, that indeed the applicant for exemption meets the requirements of the law.

34. The Appellant stated that the word ‘shall’ in the above provisions bestows a mandatory obligation. The Appellant buttressed its position by placing reliance on the case of Ako v. Special District Commissioner Kisumu & another [1989] eKLR where it was held that the prohibition is absolute, and any other interpretation or view of the particular provision would be doing violence to the very clear provisions of the law.

35. The Appellant further buttressed its position by citing the case of Republic v Council of Legal Education & another Ex parte Sabiha Kassamia & another [2018] eKLR the court held as follows:“The word "shall" when used in a statutory provision imports a form of command or mandate. It is not permissive, it is mandatory. The word shall in its ordinary meaning is a word of command which is normally given a compulsory meaning as it is intended to denote obligation. The Longman Dictionary of the English Language states that "shall" is used to express a command or exhortation or what is legally mandatory. Regard must be had to the long-established principles of statutory interpretation. At common law, there is a vast body of case law which deals with the distinction between statutory requirements that are peremptory or directory and, if peremptory, the consequences of non- compliance.”

36. The Appellant also relied on the case, Kenya Revenue Authority (KRA) vs Thika Road Baptist Church Ministries (Church) (Case NO. HCCOMMITA/ EO24/2021) where the court upheld the fact that despite the overarching principle that tax must be paid on all sources of income, the law under Section 13 as read with the First Schedule to the ITA, gives express exemption for certain incomes from the charge to tax. In this particular case where donations made to churches were the focus of exemptions. The court in that instance when deciding whether tithes, offerings and freewill donations to churches and other religious organisations was exempt from income, looked at the express exemptions from income tax as is in the circumstances of this case where the tax is expressly exempt, the Tribunal held as follows:“The Tribunal accepted the Appellant’s argument that tithes, offerings and freewill donations did not fall within the definition of chargeable income. It held that, ‘’Tithes, freewill donations and offering to the churches and other religious organisations do not fall within the scope of income which is chargeable with as per section 3(2) of the Income Tax Act.’’

37. Further when the matter was appealed to the High Court, Majanja J.opined:“The purport and import of section 13 aforesaid is that despite the overarching obligation to pay income tax on the sources of income enumerated under PART II and in particular section 3 of the ITA, a person may be exempted from paying income tax under the conditions and in the circumstances provided thereunder. What is important to note is that neither section 13 nor the First Schedule expand the meaning of income chargeable with tax under the ITA. It is only the income that is chargeable that is exempt from tax under section 13 as read with First Schedule of the ITA. I therefore find and hold that since tithes, offering and freewill donations are not income chargeable with income tax, it was not necessary for the Church to seek an exemption. The Tribunal therefore reached the correct conclusions.”

38. The Appellant therefore averred that its activities strictly fall under the ambit of the requirements provided in Paragraph 10 of the First Schedule to the ITA and it is entitled to an exemption as of right, as its income is not chargeable to tax under section 3(2) of the ITA.

(III) The Respondent’s decision did not provide specific reasons for rejecting the Appellant’s application thereby violating the Appellant’s Constitutional right to fair administrative action and a fair hearing. 39. The Appellant noted that the rejection decision did not provide the basis or reasons for the rejection. The Respondent rejected the Appellant’s application and proceeded to remark as follows:“Upon review of your application, it was established that the taxpayer’s activities are not aligned with paragraph 10 of the first schedule of the Income Tax Act 470. ”

40. The Appellant stated that first, the Respondent did not explain what it meant by stating: ‘activities are not aligned with’. The remarks made by the Respondent in its decision were unclear and did not provide specific reasons why the Appellant’s income tax exemption application was rejected. The Respondent merely stated that the Appellant’s activities were not in line with Paragraph 10 of the First schedule of the ITA.

41. The Appellant’s view was that the Respondent’s decision therefore being irregular, gave ground for it to invite the Tribunal to confirm the circumstances of the Appellant’s qualification for the exemption in issue and direct that the exemption be granted by the Respondent.

42. The Appellant stated that its activities are aligned with the provisions of Paragraph 10 of the First Schedule to the ITA and the Appellant averred that the burden of proof shifted to the Respondent to show how the activities were not aligned with the provision, if at all it had reason to doubt the authenticity of the Appellant’s application for exemption.

43. The Appellant cited the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR to demonstrate that where the Respondent created doubt as to the authenticity of a taxpayer’s prima facie evidence of their tax position, the burden of proof then shifts to the Respondent to prove that the taxpayer’s prima facie evidence is incorrect. Otherwise the taxpayer ought to be found to have discharged its burden of proof that it indeed qualifies for the tax exemption in issue. The court held as follows:“The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The Commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented.”

44. The Appellant also cited the Supreme Court of Canada’s guidance on this issue based on the following holding in Hickman Motors Ltd. v Canada and stated as follows:“…To prove a case “on its face” you must provide evidence that, unless rebutted, would prove your position. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut…”

45. The Appellant averred that if the Respondent had no cogent rebuttal of its exemption status, then it must be deemed to have fully demonstrated its status of being qualified for the exemption in issue. From the Respondent’s decision, the Respondent had not endeavoured to prove how the Appellant’s activities were not aligned with Paragraph 10 of First Schedule to the ITA and hence there was no basis for the denial of the exemption at all.

46. The Appellant further indicated that taken holistically, the remarks by the Respondent did not constitute valid reasons in law for the rejection of the income tax exemption application because despite the Appellant providing sufficient documentation detailing its activities, obligations and objects, the failure to provide reasons for the rejection of the Appellant’s income tax exemption application without any substantial basis violated the Appellant’s Constitutional right to fair administrative action and a fair hearing.

47. The Appellant stated that it has a constitutional right to fair administrative action that is expeditious, efficient, lawful, reasonable, and procedurally fair as provided in Article 47(1) of the Constitution of Kenya, 2010 (hereinafter “the Constitution”) Article 47(1) of the Constitution provides as follows:“Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.”

48. Section 6(1) and (2) of the Fair Administrative Action Act, CAP 7L of the Laws of Kenya (hereinafter “FAAA”) additionally provides as follows:“6. Request for reasons for administrative action

(1)Every person materially or adversely affected by any administrative action has a right to be supplied with such information as may be necessary to facilitate his or her application for an appeal or review in accordance with section 5. (2)The information referred to in subsection (1), may include–a.the reasons for which the action was taken; andb.any relevant documents relating to the matter.”

49. The Appellant cited the following provisions of section 49 of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”):“Where the Commissioner has refused an application under a tax law, the notice of refusal shall include a statement of reasons for the refusal.”

50. The Appellant further relied on the case Republic v. Public Procurement Administrative Review Board & Another Ex parte Selex Sistemi Integrati [2008] eKLR where the High Court expressed itself on whether an entity’s failure to give reasons for terminating the Applicant’s tender amounted to a breach of one of the fundamental principles of natural justice. The High Court stated as follows:“Failure by the 2nd Respondent to render reasons for the decision to terminate the Applicant’s tender makes the decision amenable to review by the Court since the giving of reasons is one of the fundamental tenets of the principle of natural justice. “

51. The Appellant also relied on the following holding of the High Court in the case Law Society of Kenya v Attorney General & 2 others [2022] eKLR on the fact that simplistic responses given by public authorities in the guise of being reasons for a decision were not adequate and did not meet the threshold prescribed in law.“7. 1There were nine distinct reasons which were advanced by the Petitioner in support of the application. All those reasons were responded to in the above single paragraph and in the words “The grounds to support the waiver are not sufficient.

7. 2On a balanced scale, it is this Court’s position that the Respondents’ response was too simplistic and lacking in content as to give any reasonable person the understanding of the reasons behind the refusal of the application. There was need for the Respondents to come out clearly and respond to each of the grounds made in support of the application. The Petitioner was, therefore, entitled to a well- reasoned response as to why its application was rejected.”

7. 3The response left the Petitioner at cross-roads. The Petitioner was not able to point out the inadequacy of the grounds it tendered in support of the application. Further, the Respondents did not request more information so as to close the gap of inadequacy.”

52. The Appellant stated that upon receipt of the rejection decision, it was at a crossroads-It was unable to understand the reason for the rejection and was unsure of the fate of its application as the reason provided was not comprehensive and was factually wrong. The Appellant thus submitted that that Respondent had no basis of refusing its assessment and any such basis was not communicated adequately to the Appellant in line with the provisions and letter of the law.

53. The Appellant’s witnesses, reiterated the statement of facts and specified that in addition to the activities of research, training and advancement of medical policy the Appellant also ran a complete hospital ward at the Kilifi county Hospital. The Witnesses also indicated that the Appellant offers education opportunities to Kenyans by providing students with opportunities to conduct research and learn at its facilities.

54. The Appellant’s witnesses, Ms. Kariuki outlined the fact that the Appellant assists in blood screening support and VAT testing which assists the communities to combat diseases such as HIV and AIDS. The Appellant also runs a maternity ward for the benefit of giving healthcare to mothers within the communities, takes care of infants that need critical care all in a bid to emphasize that the activities fall within Paragraph 10 of the First Schedule of the ITA.

55. The second witness of the Appellant, Ms. Mary Muthomi, went into more detail about the nature of the relationship between KEMRI -Welcome Trust and the Appellant. She outlined the activities of the Appellant emphasizing the fact that it advances medicine to protect the public against disease by conducting research to understand immunity to various diseases which affect the public; Generating advancement of the national and international policy for the public good through carrying out intervention trials against malaria; Building capacity for public good and direct provision of healthcare services and medical professionals at the Kilifi County Hospital.

56. Ms. Muthomi, the Appellant’s witness also emphasized that the activities of the Appellant was that of public character, established to alleviate distress in society and advancement in education. Her opinion was that the Respondent had misconstrued the factual position and denied the Appellant a certificate of income tax exemption unfairly.

57. The Appellant made the following prayers to the Tribunal:a.That the Appeal be allowed;b.That the Respondent’s decision dated 10th May, 2023 be set aside and annulled;c.That the Appellant’s application for exemption be allowed;d.That the costs of and incidental to the Appeal be awarded to the Appellant; ande.Any other orders that the Tribunal may deem fit.

Respondent’s Case 58. The Respondent’s case was as set out in its statement of facts dated and filed on 18th July, 2023 and the witness statement of Ms. Margaret Karanja, chief Manager, exemption, policy and tax advisory division of the Domestic taxes department of the Respondent, dated and filed on 16th February, 2024 was admitted as evidence in chief by the Tribunal on 23rd July 2024.

59. The Respondent, in its Statement of Facts stated that the Appellant was claiming to conduct facilitate support, promote, foster, develop and assist the research into, study, education and dissemination of and application of knowledge and information concerning health and biomedical sciences in all its aspects.

60. The Respondent reiterated that the Appellant made an application for income tax exemption, manually on 29th March, 2019 and upon deliberations with the Respondent re-submitted the said application on 16th May, 2022 and 13th June, 2022 whereupon it issued a decision rejecting the Appellant’s application on 10th May, 2023.

61. The Respondent further, in its statement of facts, reiterated the three grounds on which the Appellant had appealed and the Tribunal will not re-hash the same. Thereafter, it replied to the Appellant by stating as follows:

62. That it rejected the Appellant’s application for income tax exemption on the basis that it did not meet the requirements set out by Paragraph 10 of the First Schedule to the ITA. The Respondent reproduced the provisions of Paragraph 10 of the First Schedule to the ITA which the Tribunal will not rehash as this has been outlined preceding paragraphs of this Judgement.

63. The Respondent averred that the subscribers of the Appellant are Wellcome Trust Limited and the Chancellor, Maters and Scholars of the University of Oxford, both of whom are registered in England and Wales pursuant to their respective Memoranda of Association.

64. The Respondent further averred that the Appellant had in no way demonstrated to its satisfaction that the income generated was to be expended in Kenya or in circumstances in which the expenditure of the income was for the purposes which resulted in the benefit of the residents of Kenya.

65. The Respondent stated that the gains or profit of the Appellant are utilised in the course of the actual execution of relief of poverty or distress of the public, or the advancement of religion, education and the work in connection with such business is mainly carried on by beneficiaries under such purposes.

66. The Respondent averred that the Appellant failed to demonstrate by way of evidence whether it indeed carried out its duties and obligations as set out in its Memorandum of Association and that an Agreement by one of the Subscribers of the Appellant, Messrs. Wellcome Trust with a number of institutions including GoK for biomedical research and other health Programmes did not warrant a tax exemption to be issued to the Appellant.

67. The Respondent stated that the Appellant needs to demonstrate to it that in its own capacity it had met the threshold of Paragraph 10 of the First Schedule to the ITA. It further averred that the Appellant did not avail any document to substantiate its application for exemption other than documents incorporating it and Agreements between its subscribers in their own capacity to carry out biomedical research which to the Respondent did not qualify it for exemption.

68. The Respondent stated that it was incumbent upon the Appellant to prove its case as provided under section 56(1) of the TPA. The witness of the Respondent reiterated the statement of facts of the Respondent and stated that they had reviewed all the documents presented by the Appellant in its application for income tax exemption and concluded that the Appellant did not meet the requirement of exemptions under Paragraph 10 of the First Schedule to the ITA. She further stated the following, as the reasons for the decision by the Respondent to reject the income tax exemption of the Appellant:a.The Appellant fell short of the criteria provided for under the Part 1, Paragraph 10 of the First Schedule to the ITA as its purpose, objectives and activities are research based, a purpose that is outside the scope that is provided in the said paragraph.b.The income to be exempted under paragraph(sic) is for an organization that is of a public character, that is solely established for relief of poverty, relief of public distress, advancement of education or advancement of religion.c.The exemption from income tax under Paragraph 10 of the First Schedule of the ITA is principally anchored in section 13(1) of the ITA which provides as follows:“Notwithstanding anything in part II, the income specified in Part I of the First Schedule which accrued in or was derived from Kenya shall be exempt from tax to the extent specified.”d.That the said provisions of section 13 (1) as read in tandem with Paragraph 10 of the First Schedule to the ITA indicates the types of purposes that qualify the income of an organisation for exemption. The character and income of such organisation is described precisely, conditions attendant to the exemption are given and the nature of the income is well circumscribed. The specification alluded to helps ensure that the boundary of exempt income and taxable income is well delineated.

69. The witness of the Respondent further indicated that exemption is valid for five years and that the primary purpose of the Appellant was research which was outside the scope of the four purposes outlined in Paragraph 10 of the First Schedule to the ITA.

70. The Respondent prayed that the Tribunal would uphold its decision dated 10th May, 2023 and dismiss the Appeal with costs for lack of merit.

71. On 19th February, 2024, the Respondent filed a Preliminary objection in limine on points of law on the following grounds:a.That the decision rendered on 10th May, 2023 rejecting the Appellant's application for exemption did not constitute an "appealable decision" as envisaged under section 3 of the TPA.b.That the instant Appeal was premature noting that the Respondent had not issued any assessments which would necessitate the issuance of an objection decision subject to appeal.c.That the Tribunal lacked the requisite jurisdiction to consider this Appeal which challenges the Respondent's actions as unlawful and arbitrary, whose appropriate forum is judicial review. In the circumstances, the present suit is an outright abuse of the court process and ought to be dismissed with costs to the Respondent.

Parties’ Submissions 72. On 23rd July, 2024 both parties were directed to file their written submission on or before 6th August, 2024. Both parties complied. The Appellant filed its written submissions dated 6th August, 2024 on the same date. The Respondent also filed its written submissions dated 6th August, 2024 on even date.

73. The Tribunal notes that some parts of the both parties submissions were a re-hash of the respective statement of facts of the parties, the same will not be rehashed, the Tribunal will only identify the issues raised in the respective submissions that were not already outlined in the statement of facts.

74. The Appellant outlined the events at the hearing of the Appeal by outlining its witnesses’ testimony as follows:i.The Respondent carried out a site visit to the Appellant’s facility and confirmed that the Appellant runs Hospital Wards within its facility.ii.The Appellant’s research was being conducted in conjunction with KEMRI and the GoK.iii.The Appellant conducts research in regard to malaria and other prevalent tropical diseases within Kenya.iv.The Appellant is at the forefront in research and dissemination of the Covid vaccine in Kenya.v.The Appellant funded the construction of a hospital building and actively runs wards within Kilifi County Hospital.vi.The Appellant grants free treatment and health care services within the wards it administrates to the general public indiscriminately.vii.The Appellant also provides training and education opportunities for undergraduate and post graduate students.viii.The Appellant runs community trainings to educate the public on disease prevention.ix.The Appellant operates a pharmacy where free medications are dispensed to the general public.x.The Appellant’s research is presented to GoK for purposes of formulating health policies.

75. The Appellant, as part of its submissions outlined the testimony of the witness of the Respondent by first indicating that during the hearing of this matter, the Respondent’s witness, indicated that the sole reason for rejection of the exemption application was her belief that the Appellant's sole objective was to conduct research. She refused to acknowledge which research and the fact that the research that is being conducted is done so in order to promote the health of the Kenyan Population.

76. The Respondent’s witness also confirmed that she has never visited the hospital in issue, but confirmed that other officers of the Respondent had made a visit and had prepared a report, however, she testified that she did not take into consideration the result of that report, nor was it produced for the court or the Appellant to appreciate the findings of that report.

77. The Appellant submitted that when asked which applications do qualify for exemption according to hers or perhaps the Respondent’s standards, she indicated that schools and hospitals qualify, but only if they exclusively operate as schools or exclusively as hospitals.

78. When asked whether the act defines whether the term “alleviation of distress” is defined, her answer was no. When asked whether the activities of the Appellant alleviate distress in the society, she said no with no justifiable reason.

79. The Appellant submitted that Paragraph 10 of the First Schedule of the ITA neither defines the words “alleviation of distress” nor does it specify anywhere that research does not qualify under alleviation of distress.

80. The Respondent's witness refused to acknowledge that the Appellant also qualifies for exemption under education, and argued that the Appellant never applied under that, despite the Appellant’s application having stated so and their form having acknowledged that this is one of the activities the Appellant conducts.

81. The Appellant identified the following four issues for determination which it analysed, the Tribunal will only outline the first issue on which the Appellant submitted on the preliminary objection filed by the Respondent. The other issues were already outlined in the Appellant’s statement of facts and will not be re-hashed:i.Whether the Respondent erred in law and fact by alleging that the Appellant’s appeal is premature and issuing a preliminary objection against the same.ii.Whether the Respondent erred in law and in fact by alleging that the Appellant’s activities are not aligned with the provisions of Paragraph 10 of the First Schedule to the ITA.iii.Whether the Respondent erred in failing to recognise that the granting of an exemption under Paragraph 10 of the First Schedule to the ITA is couched in mandatory terms and once the applicant has complied with all the requirements of that provision the Respondent is obliged to grant the exemption.iv.Whether the Respondent’s decision which did not provide specific reasons for rejecting the Appellant’s application thereby violated the Appellant’s Constitutional right to fair administrative action.

82. On the first and only issue for determination, which the Tribunal will outline, the Appellant submitted as follows:a.Whether the Respondent erred in law and fact by alleging that the Appellant’s appeal is premature and issuing a preliminary objection against the same

83. That vide a notice of preliminary objection dated 19th February 2024 the Respondent argued that its appeal was premature noting that the Respondent was yet to issue an assessment thereof which would necessitate the issuance of an objection decision. The Respondent further argued that the decision rendered by it on 10th May 2023 rejecting its application for exemption did not constitute an appealable decision as envisaged under section 3 of the TPA. 84. The Appellant submitted that pursuant to section 3 of the TPA, the decision rendered by the Respondent dated 10th May 2023 did in fact constitute an appealable decision. Section 3 of the TPA provides as follows:“appealable decision” means an objection decision and any other decision made under a tax law other than—a tax decision; ora decision made in the course of making a tax decision;

85. The Appellant submitted that Section 3 of the TPA provides that an appealable decision is an objection decision or and any other decision made under a tax law and excludes a tax decision or any other decision made in the course of making a tax decision from being an appealable decision. The same section defines a tax decision as reproduced below:“tax decision” means—a.an assessment;b.a determination under section 17(2) of the amount of tax payable or that will become payable by a taxpayer;c.a determination of the amount that a tax representative, appointed person, director or controlling member is liable for under sections 15, 17, and 18;d.a decision on an application by a self-assessment taxpayer under section 31(2);e.a refund decision;f.a decision under section 48 requiring repayment of a refund; org.a demand for a penalty;

86. That the decision by the Respondent dated 10th May 2023 did not constitute a tax decision, neither was it a decision made in the course of making a tax decision. It squarely falls under any other decision made under a tax law and is an appealable decision.

87. That Section 52(1) of the TPA provides for the procedure for appealing tax decisions as reproduced below:“A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013. ”

88. That the Respondent’s decision dated 10th May 2023 was indeed an appealable decision based on Paragraph 10 of the First Schedule to the ITA and hence is appropriately before the Tribunal. The Appellant further submitted that the Tribunal is endowed with appropriate and competent jurisdiction to try and hear this matter.

89. As indicated above the Tribunal will not rehash the other issues which were outlined in the Appellant’s statement of facts.

90. The Respondent, in its written submissions replied to the issues raised by the Appellant in stating that the Tribunal ought to make a determination on four issues which were similar to those identified by the Appellant. On the first issue, the Respondent was of the view that it had filed a Preliminary objection and that the decision that it made on 10th May, 2023 was not an appealable decision. The Respondent submitted that the decision it made was one for which the Appellant ought to have approached a judicial review court in seeking redress.

91. In support of its assertion that the decision it made was not an appealable one, it reiterated Paragraph 10 of the First Schedule to the ITA and submitted that it could only issue an exemption for Income Tax when it was proved to its satisfaction that the Applicant had satisfied the criteria that it had set out. It submitted its view that the Appellant was challenging its decision on the basis that it exercised its discretion unlawfully, arbitrarily and unreasonably.

92. The Respondent was of the view that its decision dated 10th May, 2023 did not constitute an appealable decision as contemplated under section 3 of the TPA. The Respondent submitted that the only decision that was under the jurisdiction of the Tribunal would be one where there had been an assessment, objection by the Appellant and subsequent objection decision by it. According to the Respondent, since it did not issue an assessment and the Appellant did not object, pursuant to section 51 (1) of the TPA, the impugned decision was not in the nature of an objection decision.

93. The Respondent in its submissions place reliance on the cited case of Republic vs Commissioner of Domestic Taxes & another Ex-parte Kenton College Trust (2013) Eklr wherein a taxpayer faced with similar circumstances, approached the Judicial review court for relief. It is trite law that where a party is challenging the property of a decision made by an administrative body on the grounds herein pleaded-unlawfulness, arbitrariness and unreasonable -judicial review forum is the appropriate forum.

94. The Respondent, in its submissions also cited the case Tax Appeals Tribunal Number 1545 of 2022: Saleh Mohammed Trust vs Commissioner of Domestic Taxes where the Tribunal found the appeal to be premature and not properly before the Tribunal since it was based on the same facts as the appeal herein. It was on that basis that the Respondent contended that the Appeal was not merited and ought to be dismissed with costs.

95. In response to grounds (ii) and (iii) of the Appeal, the Respondent submitted that the Appellant did not avail any evidence that it was earning income and that it relied on donor funds to carry out its activities. The Appellant sought exemption on the ground that it is a ‘not-for-profit’ entity, and its activities are charitable and not for profit. The interest income earned on the unutilized grants is incidental to its activities, and is meant to compensate for expected impact of inflation on its future activities.

96. The Respondent submitted that Paragraph 10 of the First Schedule to the ITA provides the following with regards to trust:“Subject to section 26, the income of an institution, body of persons or irrevocable trust, of a public character established solely for the purposes of the relief of the poverty or distress of the public, or for the advancement of religion or education-

97. The Respondent further submitted that even though the terms 'relief of public distress and advancement of religion are not expressly defined in the Act, it always been guided by the Income Tax (Charitable Organizations & Donations Exemption) Rules, 2024 which it used in coming up with how an institution is allowed exemption of income tax.

98. Further to the above, the Respondent submitted that the Appellant's main works is that of research which has not been expressly provided for in Paragraph 10 of the First Schedule to the ITA.The Respondent invited the Tribunal to look at the Income Tax Statutes of United States, United Kingdom and South Africa just to mention a few which have expressly exempted Income Tax on research Activities in their Acts. This is however not the case in our Act.

99. It was the Respondent's submission that there is a pertinent reason why parliament thought it important to enact Paragraph 10 of the First Schedule of the ITA which provides that the Commissioner should be fully persuaded for exemption to be allowed. The income to be exempted, under Paragraph 10 of the First Schedule of ITA, is for an organization that is of a public character, that is solely established for relief of poverty, relief of public distress, advancement of education or advancement of religion.

100. The Respondent submitted that exemption for Income Tax under Paragraph 10 is principally anchored in Section 13(1) of ITA and that for the Appellant to be granted a tax exemption, it has to be scrutinized against the provisions of Paragraph 10 of the First Schedule to ITA which must be demonstrated to the Commissioner's satisfaction. Particularly, the Respondent submitted, there are provisions which grant the Respondent the mandate/power to revoke an exemption for a just cause:“Provided further that an exemption under this paragraph- A.Shall be valid for a period of five years but may be revoked by Commissioner for any just cause; and

B.Shall, where an applicant has complied with ALL the requirements of this paragraph, be issued within sixty days of the lodging of the application.”

101. It was evident to the Respondent that the law provides that it has the mandate to review a fresh application for exemption against the criteria laid out under Paragraph 10 of the First Schedule to the ITA.The Respondent therefore placed reliance of the provisions of paragraph 10(B) which states that it is only when ALL the requirements have been complied with that an exemption is to be granted to the applicant. The Respondent reviewed all the documents presented by the Appellant in its Application for Income Tax exemption and concluded that the Appellant did not meet the requirements of exemption under Paragraph 10 of First Schedule of ITA.

102. The Respondent further avowed that it is a trite and settled position of law that a taxpayer seeking exemptions must strictly comply with the exempting provisions. Additionally, there is no room for intendment in a tax legislation. The Respondent further submitted that when it comes to interpretation of tax legislation, the statute must be looked at using slightly different lenses as the language imposing the tax must receive a strict construction leaving no room for intendment or implication this was well brought out in the case of Cape Brandy Syndicate vs I.R. Commissioners (1921) and Mount Kenya Bottlers Ltd &3 others vs Attorney General & 3 others NRB CA Civil Appeal No. 164 of 2023.

103. The Respondent submitted that though the Appellant averred that its primary purpose is research, research is outside the scope of the four purposes provided in Paragraph 10 of the First Schedule to the ITA.The Respondent submitted that upon carrying out its research on the Appellant and noted that it did not have contracts of employees who work within the trust as averred.

104. The Respondent further submitted that the Appellant, despite claiming to be a research institution does not have any written books or articles previously done by them. During various deliberations, the Respondent requested the Appellant to provide various documents to prove its positions but failed to do so and for those reasons and the ones in the preceding paragraphs, the Respondent submitted that the Appellant failed the test for burden of proof.

105. The Respondent relied on the case of Afya X-ray Centre Limited vs Commissioner of Domestic Taxes TAT Appeal No. 70 of 2017, where the Tribunal held as follows:“From then foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents, in order that a comprehensive audit of its affairs be done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to counter the Respondent's finding after the preliminary finding and after the confirmation of the assessment. Both are instances, where the Appellant could have produced its books of accounts to counter the Respondent's assessment after all the Appellant by law bears the burden of proof .."

106. In replying to ground (iii) of the memorandum of appeal, the Respondent submitted that the Appellant hoped that the Tribunal could decide on whether its decision was contrary to Article 47[sic]. Article 47 of the Constitution provides as follows:“(1)Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.(2)If a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action the person has the right to be given to written reasons for the action.(3)Parliament shall enact legislations to give effect to the rights in clause {1} and that legislation shall;(a)Provide for the review of the administrative action by a court or, if in appropriate an independent and impartial tribunal(b)Promote efficient administration.”

107. The Respondent submitted that it is trite law that "equity aids the vigilant and not the indolent". The Appellant lodged an application for exemption on the grounds that it met all the requirements of Part 1 Paragraph 10 of ITA but did not provide documentation required to prove the Contracts of the employees working within the institution nor did it provide audited financial statements to show how the funds of the alleged trust were used. It is quite clear that the Appellant was disregarding its right to provide the requested information and therefore cannot purport to have not been accorded fair administration of justice. The Respondent submitted that it was convinced that the Appellant's was in the mission of evading payment of taxes while enjoying profit made from its businesses.

108. The Respondent submitted that it found shelter in Articles 201 and 210 of the Constitution which provide that "the public finance system shall promote an equitable society, and in particular the burden of taxation shall be shared fairly", and that "No tax or licensing fee may be imposed, waived or varied except as provided by legislation." Thus, the Respondent submits that a blanket exemption as such would have been unconstitutional.

109. The Respondent’s final submission was that the Tribunal be guided by the decision of the High Court in Republic vs. Kenya Revenue Authority Ex-parte Bata Shoe Company (Kenya) Limited [2014] eKLR, where it was held as follows:“.... Payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obligated to pay a single coin more than is due to the taxman. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer."

110. The Respondent submitted that the Appeal as relates to tax exemption to the Tribunal was invalid, incompetent and unsustainable in law as its decision in rejecting the application for exemption is not an appealable decision as per the provisions of TPA and the said application did not meet the threshold as provided for under Paragraph 10 of the First Schedule to the ITA.

Issues For Determination 111. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions has identified two issues for determination:(i)Whether the Preliminary Objection was merited.(ii)Whether it was necessary for the Appellant to seek income tax exemption.

Analysis And Findings 112. Having identified the two issues for determination the Tribunal will proceed to analyse them as follows:

(i) Whether the Preliminary Objection was merited. 113. The dispute herein arose when the Respondent rejected the Appellant’s application for an income tax exemption certificate. The application for income tax exemption was made pursuant to Paragraph 10 of the First Schedule to the ITA. The Respondent’s view is that the rejection it rendered through its letter to the Appellant, dated 10th May, 2023 did not constitute an “appealable decision” and that the instant appeal was invalid since there were not assessments, that would necessitate the issuance of an objection decision.

114. The Tribunal notes the Appellant’s opposition to the Preliminary Objection. In its submissions the Appellant outlined the provisions of section 3 of the TPA on the definition of what would constitute an “appealable decision” and further, what would constitute a “tax decision”.

115. The Tribunal will therefore first determine whether the Preliminary Objection was justified before delving into the second issue for determination. Section 3 of the TPA provides as follows regarding what would constitute an “appealable decision” and a “tax decision”:“appealable decision” means an objection decision and any other decisionmade under a tax law other than—(a)a tax decision; or(b)a decision made in the course of making a tax decision;“tax decision” means—(a)an assessment;(b)a determination under section 17(2) of the amount of tax payable or that will become payable by a taxpayer;(c)a determination of the amount that a tax representative, appointed person, director or controlling member is liable for under section 15, section 17 and section 18(d)a decision on an application by a self-assessment taxpayer under section 31(2);(e)a refund decision;(f)a decision under section 48 requiring repayment of a refund; or(g)a demand for a penalty;….”

116. The Tribunal notes the following provisions of Section 2 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) on the definition of tax law:“tax law” means—(a)the Income Tax Act (Cap. 470);(b)the Customs and Excise Act (Cap. 472); or(c)the Value Added Tax (Cap. 476);(d)the East African Community Customs Management Act, 2004;(e)any other tax legislation administered by the Commissioner;

117. From the foregoing, the Tribunal is of the view that the Respondent made a decision pursuant to the provisions of Paragraph 10 of the First Schedule to the ITA. The decision to reject the application for an income tax exemption was not a tax decision pursuant to the provisions of section 3 of the TPA but a decision made under “any other tax law”, in this case the other tax law was the ITA.

118. The Tribunal’s finding is that the decision by the Respondent to reject the application for income tax exemption was an appealable decision and the Preliminary objection by the Respondent was not merited.

(ii) Whether it was necessary for the Appellant to seek income tax exemption 119. The Tribunal notes the Appellant’s averments and evidence that it is a Company Limited by Guarantee and is a “not for profit” entity whose core business is to conduct, facilitate, support, promote, foster, develop and assist the research into, study, education, and dissemination of, and application of knowledge and information concerning health and biomedical sciences in all its aspects.

120. The Tribunal further notes the Appellant’s averments that it received grants as its main source of income. The Appellant adduced the following documentary evidence to prove its sources of its funding: Collaborative Clinical Trial Agreement with London School of Hygiene and Tropical Medicine.

Collaboration Agreement with London School of Hygiene and Tropical Medicine.

Sub-Grant Agreement between it and CGD Europe.

Consortium Agreement with Massachusetts General Hospital.

Grant Agreement with Bill and Melinda Gates Foundation.

Pictorial Evidence of work done.

List of clinical staff that it supported.

An analysis of costs of its programs.

121. The Tribunal can deduce from the evidence provided, that the Appellant was involved in the work of research in form of clinical trials and through this process it created opportunities for Masters and Fellowship students as well as other professionals to learn by participation in the trials. However, the Appellant did not prove that the members of staff were its employees as it did not adduce as evidence, contracts of any nature between it and the employees to enable the Tribunal decide on its assertion regarding the level of support to staff whether in terms of financial support or building the capacity of the employees through training Programmes. The Pictorial evidence was insufficient in proving that persons in the photographs were its employees. The Tribunal however, notes that it is the beneficiaries of the Appellant that had signed contracts with the GoK and it relied heavily on these contracts signed as early as 1964 for purposes of collaboration with GoK.

122. At this stage, the Tribunal will delve into the meaning of income since during the hearing on 23rd July, 2024, the Respondent’s witness was adamant on the definition of income for purposes of exemption and stated that income tax exemption is sought in respect to “income”. Section 13 (1) Paragraph and 10 of the First Schedule to the ITA provides as follows:“13. Certain income exempt from tax, etc.(1)Notwithstanding anything in Part II, the income specified in Part I of the First Schedule which accrued in or was derived from Kenya shall be exempt from tax to the extent so specified….”Paragraph 10 of the First Schedule to the ITA“10. Subject to section 26, the income of an institution, body of persons or irrevocable trust, of a public character established solely for the purposes of the relief of the poverty or distress of the public, or for the advancement of religion or education—

(a)established in Kenya; or(b)whose regional headquarters is situated in Kenya, in so far as the Commissioner is satisfied that the income is to be expended either in Kenya or in circumstances in which the expenditure of that income is for the purposes which result in the benefit of the residents of Kenya:Provided that any such income which consists of gains or profits from a business shall not be exempt from tax unless such gains or profits are applied solely to such purposes and either—(i)such business is carried on in the course of the actual execution of such purposes;(ii)the work in connexion with such business is mainly carried on by beneficiaries under such purposes; or(iii)such gains or profits consist of rents (including premiums or any similar consideration in the nature of rent) received from the leasing or letting of land and any chattels leased or let therewith; and provided further that an exemption under this paragraph— (A) shall be valid for a period of five years but may be revoked by the Commissioner for any just cause; and (B) shall, where an applicant has complied with all the requirements of this paragraph, be issued within sixty days of the lodging of the application.”

123. In view of the foregoing provisions of Paragraph 10 of the First Schedule to the ITA, it is evident that a non-profit organisation can earn income from various sources namely grants or income consisting of gains and profits from a business. The Appellant, from the documentation provided was earning income from grants and not from business, during the hearing it indicated that it was intending to start carrying out its on business from which it would earn gains or profits. However, it did not provide proof of an existing business or how it was expending the income towards its purpose. The income it earned was from grants, pursuant to the Agreements that it had adduced as evidence and the expenditure of such grants was clearly outlined in the Agreements. The Grants were to enable it to carry out research.

124. The Tribunal having reviewed the evidence adduced by the Appellant is of the view that the Appellant is a body of persons, has a public character and was established and based in Kenya and that it could be said to have been solely established for the purposes of relief of poverty and distress of the public and for the advancement of education. The research carried on by the Appellant is towards the purposes as outlined in Paragraph 10 of the First Schedule to the ITA and the Tribunal finds that the averments by the Respondent in this regard, that the Appellant was not established in and for such a manner, were incorrect.

125. Section 3 (2) of the ITA charges the following income to tax:“(2)Subject to this Act, income upon which tax is chargeable under this Act is income in respect of—(a)gains or profits from—(i)any business, for whatever period of time carried on;(ii)any employment or services rendered;(iii)any right granted to any other person for use or occupation of property;(b)dividends or interest;(c)(i)a pension, charge or annuity; and(ii)any withdrawals from, or payments out of, a registered pension fund or a registered provident fund or a registered individual retirement fund; and(iii)any withdrawals from a registered home ownership savings plan;(ca)income accruing from a business carried out over the internet or an electronic network including through a digital marketplace;(d)deleted by Act No. 14 of 1982, s. 17;(e)an amount deemed to be the income of any person under this Act or by rules made under this Act;(f)gains accruing in the circumstances prescribed in, and computed in accordance with, the Eighth Schedule;(g)subject to section 15(5A), the net gain derived on the disposal of an interest in a person, if the interest derives twenty per cent or more of its value, directly or indirectly, from immovable property in Kenya;(h)a natural resource income; and(i)gains from financial derivatives, excluding financial derivatives traded at the Nairobi Securities Exchange.(2A)The Cabinet Secretary shall make regulations to provide for the mechanisms of implementing the provisions of subsection (2)(ca).”

126. The Tribunal’s firm view is that the Grants that the Appellant received under the various Agreements that it had signed do not fall under the the ambit of chargeable income pursuant to the provisions of Section 3(2) of the ITA. The Grants are not by their very nature, income chargeable to tax. The further view of the Tribunal is that the application by the Appellant for exemption from income tax was one for anticipatory exemption. Paragraph 10 of the First

127. The Tribunal observes that the Appellant, had future plans to sustain its work by engaging in businesses from which it would earn income chargeable to tax under the ambit of Section 3(2) of the ITA and it had a vision that the income earned from the businesses which would ordinarily have been chargeable to income tax would be expended towards its objective. However, the Appellant was unable to demonstrate that its plans had already been implemented. The Appellant earned interest from the Bank on the grants it had deposited in a bid to hedge against inflation. Withholding tax is applied on such interest and that is a final tax pursuant to Paragraph 5 (h) (iii) of the Third Schedule to the ITA. In this regard, the Appellant did not demonstrate how it would have expended the interest income towards alleviation of poverty and distress of the public since the interest earned was a hedge against inflation to safeguard the impact of inflation on the Grants it received.

128. The Tribunal cites the following holding in the case of Commissioner of Domestic Taxes vs Thika Road Baptist Ministries (Tax Appeal E024 of 2021) [2022] KEHC 644(KLR):“The purport and import of section 13 aforesaid is that despite the overarching obligation to pay income tax on the sources of income enumerated under part II and in particular section 3 of the ITA, a personmay be exempted from paying income tax under the conditions and in the circumstances provided thereunder. What is important to note is that neither section 13 nor the First Schedule expand the meaning of income chargeable with tax under the ITA. It is only the income that is chargeable that is exempt from tax under section 13 as read with First schedule of the ITA. I therefore hold that since tithes, offering and freewill donations are not income chargeable with income tax, it was not necessary for the Church to seek an exemption. The Tribunal therefore reached the correct conclusions.”

129. The Tribunal’s finding is that it was unnecessary for the Appellant to seek income tax exemption.

Final Decision 130. The upshot of the foregoing is that the Appeal fails and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The decision of the Respondent dated 10th May, 2023 is hereby upheld.c.Each party to bear its own costs.

131. It is so Ordered.

DATED AND DELIVERED AT NAIROBI THIS 27TH DAY OF SEPTEMBER, 2024. …………..……………….CHRISTINE A. MUGA- CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER