Dhanjal v Commissioner of Domestic Taxes [2024] KETAT 1259 (KLR)

Dhanjal v Commissioner of Domestic Taxes (Appeal E619 of 2023) [2024] KETAT 1259 (KLR) (23 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1259 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E619 of 2023

E.N Wafula, Chair, G Ogaga, Jephthah Njagi & E Ng'ang'a, Members

August 23, 2024

Between

Daljit Singh Dhanjal

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a businessman who owns various properties and has interest in various industries in Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Appellant declared in its self-assessment Capital Gains Tax return for the period of December 2022 sales proceeds of Kshs. 177,915,900. 00 from the sale of land, and claimed incidental costs of Kshs. 6,913,814. 00 comprising agent’s commission of Kshs. 6,191,474. 00 and legal fees of Kshs. 722,340. 00 and acquisition cost of Kshs. 150,000,000. 00 on the land.

4. The Respondent conducted a return review and disallowed the acquisition cost of Kshs. 150,000,000. 00 claimed in the self-assessment CGT return for the period under review, and subsequently raised an additional assessment of CGT on 6th March 2023.

5. The Appellant lodged a late notice of objection on 22nd June 2023 which the Respondent accepted on 5th July 2023. The Appellant provided documents in support of the objection on 10th July 2023.

6. The Respondent issued its objection decision on 10th August 2023, which the Appellant appealed against at the Tax Appeals Tribunal after filing a Notice of Appeal on 8th September 2023.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated 21st September 2023 and filed on 22nd September 2023 which raised the following grounds: -a.That the Respondent erred in law in disallowing the adjusted cost of the property and as such the Respondent’s assessment is erroneous and lacks legal basis.b.That the Respondent’s conduct is unfair and infringes on the taxpayer’s rights and freedoms under the Constitution.

Appellant’s Case 8. The Appellant’s case was premised on the following documents filed before the Tribunal: -a.The Appellant’s Statement of Facts dated 21st September 2023 and filed on 22nd September 2023 and the documents attached to it; andb.The Appellant’s written submissions filed on 2nd April 2024.

9. The Appellant stated that the property (being land LR No. Kwale/Galu/Kinondo/670) was transferred to him by way of transmission in the year 2014 from the Estate of his deceased father.

10. The Appellant further stated that he received an offer from Omicron Resources Limited which offered to purchase the property for the sum of Kshs. 30,000,000 per acre, aggregating to the total sum of Kshs. 177,915,900. 00. That the Appellant and Omicron Resources Limited reached a consensus and entered into a sale agreement, after which the Appellant received a deposit of 10% of the purchase price in December 2022.

11. The Appellant averred that its self-assessed Capital Gains Tax (CGT) liability of Kshs. 1,050,105. 00 was computed and paid to KRA on 30th December 2022 in compliance with his tax obligations as set out in Section 3(2)(f) of the Income Tax Act as read together with the Eighth Schedule to the Income Tax Act.

12. The Appellant averred that he received a demand dated 16th May 2023 that demanded him to settle Kshs. 25,338,215. 00 (comprising principal tax of Kshs. 24,600,208. 00 and penalty of Kshs. 738,007. 00) within 14 days from the date of the demand.

13. The Appellant further averred that he responded to the demand by a letter dated 24th May 2023 where he disputed the demand, requested for the Respondent’s computations supporting the demand and informed the Respondent that he was yet to be issued with an assessment. That it was only after this letter that the Respondent notified the Appellant of the assessment by way of an email dated 29th May 2023.

14. The Appellant then lodged his notice of objection on 22nd June 2023 in which he objected to the assessment in its entirety.

15. That the Respondent issued its objection decision on 10th August 2023 where it confirmed a tax assessment of Kshs. 8,745,000. 000 inclusive of penalties and interest on the basis that the adjusted cost of Kshs. 150,000,000. 00 was not allowable in computing the CGT for the transfer of the property.

16. The Appellant being aggrieved by the objection decision, lodged this Appeal.

17. The Appellant asserted that the Respondent’s assertion has no legal basis.

18. The Appellant submitted that adjusted cost is defined in Paragraph 8 of the Eighth Schedule to the Income Tax Act.

19. The Appellant averred that it is an uncontroverted fact that the Appellant acquired the property in question by way of transmission after the demise of his father. The Appellant argued that in circumstances like the Appellant’s, where one inherits land and therefore does not pay actual cash for the property, Paragraph 9(1)(d)(ii) of the Eighth Schedule to the Income Tax Act provides that the applicable adjusted cost of the property is the market value.

20. The Appellant averred that transfers of property through transmission are exempt from stamp duty and therefore there is no consideration used in computing the stamp duty payable. That as such, the acquisition cost in cases where property is acquired by way of transmission is the market value of the property at the time of acquisition.

21. That prior to the Appellant acquiring the land in 2014, the Appellant and his brothers had sought to acquire a finance facility with Diamond Trust Bank (DTB) and charge the land in question. That DTB procured the services of DK Real Estates Limited, a real estate valuer to value the land before advancing the facility. That DK Real Estate Limited established that the property had an open market value of Kshs 150,000,000. 00 in its report dated 15th August 2014.

22. The Appellant asserted that the veracity of this report cannot be questioned as it was procured by a third-party bank to ascertain the value of security before advancing a financial facility.

23. The Appellant submitted that in preparing his CGT computation, he deducted the acquisition cost of Kshs. 150,000,000. 00 in compliance with Paragraph 9(1)(d)(ii) of the Eighth Schedule to the Income Tax Act. That Paragraph 9 of the Eighth Schedule to the Income Tax Act provides as follows: -“(1)Where property is acquired or transferreda)otherwise than by way of a bargain made at arm’s length;b)by way of a gift in whole or in part;c)for a consideration that cannot be valued: ord)as the result of a transaction between persons who are related then, for the purposes of –(i)paragraph 7 of this Schedule, the amount of the consideration for the transfer of the property shall be deemed to be equal to the market value of the property at the time of the transfer; and(ii)paragraph 8 of this Schedule, the amount of the consideration for the acquisition of the property shall be deemed to be equal to the market value of the property at the time of the acquisition or to the amount of the consideration used in computing stamp duty payable on the transfer by which the property was acquired, whichever is the lesser.”

24. That transfers of property through transmission are exempt from stamp duty and therefore there is no consideration used in computing the stamp duty payable. As such, that the acquisition cost in cases where property is acquired by way of transmission is the market value of the property at the time of acquisition.

25. The Appellant submitted that the Tax Appeals Tribunal recently ruled on a tax dispute with similar facts as this case in Shah & 2 others v Commissioner of Domestic Taxes (Tribunal Appeal 587 of 2021) (2023) KETAT 114 (KLR) (Civ) (17 March 2023) (Judgment) where the Tribunal found that the adjusted cost of property which is acquired or transferred by way of a gift in whole or in part, the amount of the consideration for the acquisition of the property shall be deemed to be equal to the market value of the property at the time of its acquisition, or to the amount of consideration used in computing stamp duty payable on the transfer by which the property was acquired, whichever is the lesser.

26. The Appellant contended the Respondent’s averment that it has appealed against the Tribunal’s decision by stating that before the High Court pronounces itself on that appeal, the finding by the Tribunal in the aforementioned Shah case is applicable.

27. The Appellant averred that the Respondent’s submission that it relied on Sections 24 and 31 of the Tax Procedures Act to make an additional assessment based on the information available to it lacks merit.

28. The Appellant, in its contention, argued that Section 31 of the Tax Procedures Act is only available where the Respondent has not been provided with specific information to enable it make an assessment. That in this case, all the relevant information, including the valuation report, was provided from the pre-audit stage, in the objection and to the Respondent’s Independent Review of Objections team.

29. The Appellant contended the Respondent’s reliance on Section 56(1) of the Tax Procedures Act. The Appellant submitted that this legal provision is inapplicable in this instance. The Appellant asserted that it provided all the relevant documents to show that the adjusted cost of Kshs. 150,000,000. 00 was allowable in arriving at the capital gain he computed. That the Appellant satisfied his burden of proof according to Section 56(1) of the Tax Procedures Act and that following this, the burden swung to the Respondent to prove that its tax decision is correct.

30. The Appellant also relied on the cases of HCITA No. 121 of 2021: Commissioner of Domestic Taxes vs. Metoxide Africa Ltd and Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) (24 January 2022) (Judgment) in support of his case.

31. The Appellant stated that from the foregoing, he has demonstrated that the adjusted cost deducted of Kshs. 150,000,000. 00 was supported by law and prayed that this Tribunal vacates the Respondent’s CGT assessment.

Appellant’s prayers 32. The Appellant prayed for the following orders from the Tribunal: -a.This Appeal be allowed.b.The Tribunal to set aside and annul the objection decision issued by the Respondent.c.The Tribunal to order that the Respondent pays the costs of this Appeal.d.The Tribunal to make such other orders that it may deem appropriate.

Respondent’s Case 33. The Respondent’s case was premised on the following documents:a.Its Statement of Facts dated 8th November 2023 and filed on 14th November 2023 and the documents attached to it; andb.Its written submissions dated and filed on 17th April 2024.

34. The Respondent stated that it received information that the Appellant acquired land in 2014 by way of transmission after his father passed away.

35. The Respondent further stated that it received information that Omicron Resources Limited offered to purchase the Appellant’s property for the sum of Kshs. 30,000,000. 00 per acre, aggregating Kshs 177,915,900. 00. That upon reaching a consensus, the Appellant and Omicron Resources Limited entered into a Sale Agreement. That the Appellant received a deposit of 10% of the purchase price in December 2022. The Respondent averred that the Appellant transferred land to Omicron Resources Limited in December 2022.

36. The Respondent affirmed that the Appellant declared sales proceeds of Kshs. 177,915,900. 00 from the sale of land, and claimed incidental costs of Kshs. 6,913,814. 00 comprising agent’s commission of Kshs. 6,191,474. 00 and legal fees of Kshs. 722,340. 00 and acquisition cost of Kshs. 150,000,000. 00 on the land in the self-assessment Capital Gains Tax (CGT) return.

37. The Respondent averred that it conducted a return review and disallowed the acquisition cost of Kshs. 150,000,000. 00 claimed in self-assessment CGT return for the period under review, and subsequently raised an additional assessment of CGT on 6th March 2023.

38. The Respondent stated that the Appellant lodged a late notice of objection on 22nd June 2023 which the Respondent accepted on 5th July 2023. That the Appellant provided the documents in support of the objection on 10th July 2023.

39. The Respondent further stated that the Appellant availed the sale agreement, bank statements, valuation report by DK Real Estates Limited and title deed for consideration in support of the objection.

40. The Respondent issued its objection decision on 10th August 2023, which the Appellant appealed against at the Tax Appeals Tribunal.

41. The Respondent made submissions on the following issues:a.Whether the Respondent’s computation of CGT is in accordance with the relevant provisions of the law; andb.Whether the Respondent’s additional assessments are justified.

a. On whether the Respondent’s computation of CGT is in accordance with the relevant provisions of the law. 42. The Respondent submitted that the main issue in dispute in the case is how to compute CGT in respect of the quoted transaction between the Appellant and Omicron Resources Limited.

43. The Respondent further submitted that CGT is chargeable on gains or profits made on the transfer of land and buildings, and that the rationale for computation of CGT is set out in Paragraph 4(1), Part I of the Eighth Schedule to the Income Tax Act which provides that:-“The gain which accrues to a person on the transfer of any property is the amount by which the transfer value of the property exceeds the adjusted cost of the property.”

44. The Respondent submitted that Paragraph 6(1) of Part I of the Eighth Schedule to the Income Tax Act defines what constitutes a transfer for the purposes of the Eighth Schedule, and that in this case, the Agreement for Sale between the Appellant and Omicron Resources Limited falls under Paragraph 6(1)(a) that provides as follows: -“Subject to this Schedule there is a transfer of property for the purposes of this Schedule–(a)where property is sold, exchanged, conveyed or otherwise disposed of in any manner whatever (including by way of gift), whether or not for consideration”

45. That after the sale, the Appellant filed a self-assessment CGT return and claimed an acquisition cost of Kshs. 150,000,000. 00 and incidental costs of Kshs. 6,913,814. 00.

46. The Respondent cited that the Appellant relied on a valuation carried out by DK Real Estates Limited to determine the value of the land at the time of acquisition.

47. The Respondent stated that the Appellant referred to Paragraphs 8 and 9 of Part I of the Eighth Schedule to the Income Tax Act to justify the use of market value as the acquisition cost at the time of transfer of the property.

48. The Respondent stated that it disallowed the acquisition cost of Kshs. 150,000,000. 00 and charged CGT on the adjusted capital gain at the rate of 5%.

49. The Respondent submitted that for adjusted cost to be allowed under Paragraph 8 of Part I of the Eighth Schedule to the Income Tax Act it ought to consist of the following: -“(a)the amount of or value of the consideration for the acquisition or construction of the property;(b)the amount of expenditure wholly and exclusively incurred on the property at any time after its acquisition by or on behalf of the transferor for the purpose of enhancing or preserving the value of the property at the time of the transfer;(c)the amount of expenditure wholly and exclusively incurred at any time after the acquisition of the property by the transferor establishing, preserving or defending the title to, or a right over, the property, and(d)the incidental costs to the transferor of acquiring the property.”

50. The Respondent argued that from a reading of the above provisions, it is evident that the Appellant’s purported cost of acquisition does not fall within this category by dint of the fact that the properties were transferred to the Appellant through transmission. That the Appellant, therefore, never incurred any cost in the acquisition of the property for the market value to qualify for inclusion under adjusted cost.

51. The Respondent thus averred that its conclusion that the Appellant incurred nil consideration cost at the time that the property was acquired or inherited was correct.

52. The Respondent referred to Paragraph 9 of the Eighth Schedule to the Income Tax Act which provides that: -“Where property is acquired or transferred –a.otherwise than by way of a bargain made at arm's length;b.by way of a gift in whole or in part;c.for a consideration that cannot be valued; ord.as the result of a transaction between persons who are related then, for the purposes ofi.paragraph 7 of this Schedule, the amount of the consideration for the transfer of the property shall be deemed to be equal to the market value of the property at the time of the transfer; andii.paragraph 8 of this Schedule, the amount of the consideration for the acquisition of the property shall be deemed to be equal to the market value of the property at the time of the acquisition or to the amount of the consideration used in computing stamp duty payable on the transfer by which the property was acquired, whichever is the lesser.”

53. The Respondent submitted that pursuant to the provisions of Paragraph 6(2)(c) and (d) of the Eighth Schedule to Income Tax Act, the conveyance of property from the deceased to the beneficiaries did not constitute a 'transfer' effected in the acquisition of the property, therefore, the provisions of Paragraph 9 of the Eighth Schedule to the Income Tax Act are not applicable.

54. The Respondent averred that the upshot of the foregoing is that the market value that the Appellant seeks to employ as a basis to compute adjusted cost cannot be deemed to be the amount that the properties were acquired/transferred at.

55. The Respondent urged the Tribunal to find that the market value of property cannot be considered to be the acquisition cost since the same was not incurred/expended by the Appellant and the Appellant did not incur any consideration at the time when he inherited/acquired the property.

b. On whether the Respondent’s additional assessments are justified 56. The Respondent further submitted that pursuant to the provisions of Section 24(2) of the Tax Procedures Act, it is not bound by the tax return or information provided by the taxpayer and that it is empowered to assess any taxpayer based on information available to it.

57. The Respondent further submitted that Section 31 of the Tax Procedures Act allows the Respondent to make additional assessment based on the information placed before it using its best judgment.

58. The Respondent averred that it relied on its best judgement based on information available to it in compliance with Section 31 of the Tax Procedures Act while raising the additional CGT assessment. That the Court in Commissioner of Domestic Taxes v Altech Stream (Ea) Limited [2021] eKLR stated that Section 31(1) of the Tax Procedures Act allows the Commissioner to make an assessment based on such information as may be available and to the best of his judgement.

59. On this basis, the Respondent submitted that it has demonstrated in its application of the law that its decision to disallow the acquisition cost was justified.

60. The Respondent asserted that it was guided by Constitutional principles, rules of natural justice and applicable tax statutes in both the process leading up to the issuance of the objection decision and the actual decision. That it is therefore misleading for the Appellant to allege that the Respondent’s conduct is unfair and infringes on the Appellant’s rights and freedoms under the Constitution.

61. Further, that the Appellant has not proved the allegation captured above. That Section 108 of the Evidence Act provides that: -“The burden of proof in a suit or proceeding lies on that person who would fail if no evidence at all were given on either side.”

62. The Respondent submitted that Section 56(1) of the Tax Procedures Act places the burden on the taxpayer to prove that a tax decision is incorrect and pleaded that the objection decision is thus not flawed as alleged by the Appellant.

Respondent’s prayer 63. The Respondent prayed that the Tribunal:a.Dismisses the Appeal with costs.

Issue For Determination 64. The Tribunal has considered the facts of the matter and the submissions made by the parties and considers that a single issue falls for its determination as follows:Whether the Respondent was justified in issuing its objection decision dated 10th August 2023.

Analysis And Findings 65. The Tribunal hereby proceeds to analyze the issues that call for its determination as hereunder.

66. The Appellant stated that the property (being land LR No. Kwale/Galu/Kinondo/670) was transferred to him by way of transmission in the year 2014 from the Estate of his deceased father.

67. That Omicron Resources Limited offered to the Appellant to purchase the property for the sum of Kshs. 30,000,000 per acre, aggregating to the total sum of Kshs. 177,915,900. 00 and upon reaching a consensus with the Appellant, they entered into a Sale Agreement, after which the Appellant received a deposit of 10% of the purchase price in December 2022.

68. The Respondent averred that it conducted a return review and disallowed the acquisition cost of Kshs. 150,000,000. 00 claimed in the self-assessment CGT return for the period under review, and subsequently raised an additional assessment on CGT on the 6th March 2023.

69. The Appellant averred that its self-assessed Capital Gains Tax (CGT) liability of Kshs. 1,050,105. 00 was computed and paid to KRA on 30th December 2022 in compliance with his tax obligations as set out in Section 3(2)(f) of the Income Tax Act as read together with the Eighth Schedule to the Income Tax Act.

70. The Appellant objected to the assessment and availed the sale agreement, bank statements, valuation report by DK Real Estates Limited and title deed for consideration in support of the objection.

71. The Respondent issued its objection decision on 10th August 2023, which the Appellant appealed against at the Tribunal.

72. The Respondent submitted that the main issue in dispute in the case is how to compute CGT in respect of the quoted transaction between the Appellant and Omicron Resources Limited.

73. The Respondent contended the Appellant’s reliance on a valuation of the property that was carried out by DK Real Estates Limited to determine the amount of or value of the consideration for the acquisition of the property.

74. The Respondent submitted that pursuant to the provisions of Paragraph 6(2)(c) & (d) of the Eighth Schedule to Income Tax Act, the conveyance of property from the deceased to the beneficiaries did not constitute a 'transfer' effected in the acquisition of the property, therefore, the provisions of Paragraph 9 of the Eighth Schedule to the Income Tax Act are not applicable.

75. The Respondent argued that by dint of the fact that the property was transferred to the Appellant through transmission, the Appellant never incurred or expended any cost in the acquisition of the property at the time when he inherited it for its market value to qualify for inclusion under the adjusted cost in the subsequent transfer of the property.

76. It is not in dispute by both the Appellant and the Respondent that the Appellant acquired the property transferred to Omicron Resources Limited through transmission as inheritance in the course of administration of the Estate of his deceased father.

77. Furthermore, it is not disputed that the transaction of transmission of the land in question was exempt from CGT under Paragraph 6(2) of the Eighth Schedule to the Income Tax Act.

78. The parties are also in concurrence that the Appellant did not incur any amount of consideration for the acquisition cost upon the transfer of the property at the time of the acquisition of the property.

79. Finally, the Respondent did not dispute that the market value of the property in question, as computed by DK Real Estates Limited as given in the valuation report dated 15th August 2014, was the market value of the property when the Appellant acquired the property. The Respondent, likewise, did not also provide an alternative market value for the property.

80. The dispute that the Tribunal is left to determine is whether the market value of inherited property at the time of the acquisition would comprise the adjusted cost for the property on a transfer subsequent to acquisition by inheritance.

81. The Tribunal notes that the Appellant attached as evidence a completed form R.L 7 ‘Transfer by Personal Representative to Person Entitled Under a Will or an Intestacy’ dated 17th September 2014, which transferred the interest in the title to land Title No. Kwale/Galu/Kinondo/670 to the Appellant, being a beneficiary to the Estate of his deceased father.

82. The Appellant likewise attached as evidence the title deed of the said property which confirmed that the Appellant was the registered owner of the land effective from 2nd October 2014.

83. In addition to the property transfer documents and title to property, the Appellant attached a valuation report dated 15th August 2014 prepared by DK Real Estates Limited on the instruction of Diamond Trust Bank Kenya Limited on behalf of the Appellant.

84. The Tribunal examined the evidence presented by the parties in the Appeal and the clear reading of the Income Tax Act to establish whether the Respondent was justified in issuing its objection decision.

85. Paragraph 8 of the Eighth Schedule to the Income Tax Act provides as follows: -“(1)Subject to this Schedule, the adjusted cost of any property is–(a)the amount of or value of the consideration for the acquisition or construction of the property;(b)the amount of expenditure wholly and exclusively incurred on the property at any time after its acquisition by or on behalf of the transferor for the purpose of enhancing or preserving the value of the property at the time of the transfer;(c)the amount of expenditure wholly and exclusively incurred at any time after the acquisition of the property by the transferor establishing, preserving or defending the title to, or a right over, the property; and(d)the incidental costs to the transferor of acquiring the property ...”

86. Paragraph 9 of the Eighth Schedule to the Income Tax Act provides as follows: -“(1)Where property is acquired or transferred–(a)otherwise than by way of a bargain made at arm’s length;(b)by way of a gift in whole or in part;(c)for a consideration that cannot be valued; or(d)as the result of a transaction between persons who are related then, for the purposes of–(i)paragraph 7 of this Schedule, the amount of the consideration for the transfer of the property shall be deemed to be equal to the market value of the property at the time of the transfer; and(ii)paragraph 8 of this Schedule, the amount of the consideration for the acquisition of the property shall be deemed to be equal to the market value of the property at the time of the acquisition or to the amount of the consideration used in computing stamp duty payable on the transfer by which the property was acquired, whichever is the lesser.(2)Property is acquired or transferred by way of a bargain at arm’s length only if the consideration is determined as between an independent willing buyer and an independent willing seller.(3)The Commissioner may determine the market value of any property, and a reference in this paragraph to the market value of property is a reference to the price which the property would fetch if sold in the open market as so determined.”

87. Paragraph 6(2) of the Eighth Schedule to the Income Tax Act provides as follows:“(2)There is no transfer of property for the purposes of this Schedule–(a)…(b)…(c)…(d)by the transfer by a personal representative of any property to a person as legatee in the course of the administration of the estate of a deceased person.For this purpose, "legatee" includes a person taking under a devise or other testamentary disposition or on an intestacy or partial intestacy whether he takes beneficially or as a trustee;(e)…(f)…(g)…(h)…”

88. The Tribunal notes that Paragraph 6(2)(d) of the Eighth Schedule to the Income Tax Act provides what does not constitute a transfer of property, however, contrary to the Respondent’s assertion, the provision does not negate that the Appellant indeed acquired the property by transmission in the testamentary disposition pursuant to him being a beneficiary of his deceased father’s Estate.

89. In which case, the Tribunal finds that Paragraph 6(2)(d) does not preclude the Appellant from applying Paragraph 9 to ascertain the amount of the deemed consideration for the acquisition of the property for purposes of Paragraph 8 of the Eighth Schedule to the Income Tax Act.

90. The Appellant acquired the property in question by inheritance following a testamentary disposition as he was a beneficiary of the Estate of his deceased father. On this basis, the Tribunal finds that this acquisition by inheritance falls in the categories of Paragraph 9(1)(b) as the property was acquired by way of a gift in whole and Paragraph 9(1)(d) as the property was acquired as the result of a transaction between persons who are related.

91. It follows then that for the purposes of ascertaining the adjusted cost under Paragraph 8 of the Eighth Schedule to the Income Tax Act, Paragraph 9(ii) of the Schedule applies to determine the amount of consideration for the acquisition of inherited property. The provision states that the amount of the consideration for the acquisition of the property is deemed to be the lesser of:a.the market value of the property at the time of the acquisitionorb.the amount of the consideration used in computing stamp duty payable on the transfer by which the property was acquired.

92. The Tribunal observes that the transfer of the property in the testamentary disposition, such as in the case of the Appellant who inherited property from the Estate of his deceased father, is a transaction exempt from stamp duty under Section 117(1)(h) of the Stamp Duty Act which provides: -“(1)There shall be exempt from stamp duty under this Act—(h)a will, codicil, registered family trust or other testamentary disposition;”

93. Given that there was no stamp duty calculation in the acquisition of the property by the Appellant through inheritance, the amount of consideration used in computing stamp duty payable on the transfer is not applicable, and cannot, therefore, be used as the deemed amount of consideration in the subsequent transfer of the inherited property to Omicron Resources Limited.

94. Consequently, the Tribunal finds that for a transfer exempt from stamp duty, the amount of consideration for the property acquired by inheritance will be deemed to be equal to the market value of the property at the time of acquisition, which in this case is Kshs. 150,000,000. 00, in accordance with Paragraph 9 of the Eighth Schedule to the Income Tax Act.

95. The Tribunal reiterates its decision in Shah & 2 Others v Commissioner of Domestic Taxes TAT Appeal No. 587 of 2021 wherein the Tribunal held as follows in circumstances similar to the extant case: -“59. The Appellants herein acquired the properties known as LR 1871/11/404 and LR 1871/11/406 through a transfer on 30th September, 2015, upon the confirmation of a grant of probate, as legatees of the deceased owner, who was their father. The transfer therefore falls within the four corners of Paragraph 9 of the Eighth Schedule, as a property acquired and transferred by way of a gift, and between persons who are related. The cost basis for purposes of adjusting costs for determining CGT is therefore the fair market value as at the date of transfer, or the consideration applied to determine stamp duty for the transaction whichever is the lesser, as provided for in the aforesaid paragraph.

60. The two parties are in agreement that as at the time of transmission or transfer of the properties to the Appellants as legatees of the owner’s estate in the year 2015, a valuation was undertaken by a professional valuers Frank Knight Ltd, which determined the fair market value to be the sum of Kshs 389, 619, 600 (Kshs. 264,435,000. 00 for LR 1871/11/404, and Kshs 125,184,600. 00 for LR 1871/11/406).

61. In the Tribunal’s considered view therefore, having regard to Paragraph 9 of the Eighth Schedule to the Act, this valuation as presented by Knight Frank Ltd professional valuers represents the fair market value at the time of the acquisition of the subject properties by the Appellants as legatees. That being the case then, the Appellants were entitled and justified to apply the abovesaid value as the cost basis for the adjustment of costs for purposes of determination of the Capital Gains Tax payable.

62. Consequently, the Tribunal therefore finds that the Appellants correctly applied the fair market value of the Properties as at the time of the acquisition by the legatees as the cost basis of applying the adjustment of costs for the determination of the CGT payable in the transfer between the Appellants and the independent third-party purchaser for value, Risun Development Company Ltd.

96. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal (TAT) Act place the burden of disproving the Commissioner’s assessment and decision upon the taxpayer. To satisfy this burden, a taxpayer ought to submit all the relevant evidentiary material in its possession.

97. The Tribunal refers to the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the Court held at paragraph 26 with regard to the shifting of burden of proof as thus: -“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the tax payer.”

98. The Tribunal finds that the Appellant discharged its burden of proof by disproving the Respondent’s assessment and objection decision with evidence, applicable law and case law, and thus the Respondent has not persuaded the Tribunal to depart from its decision in Shah & 2 Others v Commissioner of Domestic Taxes TAT Appeal No. 587 of 2021 (supra).

99. Accordingly, the Tribunal finds that the Respondent erred in issuing the objection decision dated 10th August 2023.

Final Decision 100. The upshot of the foregoing analysis is that the Tribunal finds that the Appeal is meritorious and accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 10th August 2023 be and is hereby set aside.c.Each party to bear its own costs.

101. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF AUGUST, 2024. ERIC NYONGESA WAFULA - CHAIRMANGLORIA A. OGAGA- MEMBERJEPHTHAH NJAGI - MEMBEREUNICE N. NG’ANG’A- MEMBER