Karen Hospital Limited v Commissioner of Domestic Taxes [2023] KETAT 941 (KLR)

Karen Hospital Limited v Commissioner of Domestic Taxes (Appeal 1554 of 2022) [2023] KETAT 941 (KLR) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 941 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1554 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, SS Ololchike & AM Diriye, Members

December 20, 2023

Between

The Karen Hospital Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

(Appeal against the Respondent's response of 18th November 2022)

Judgment

1. The Appellant is a private health facility in Kenya and a registered taxpayer.

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 & 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. The Appellant first applied for leave to claim capital deduction in respect of expenditure on building and machinery on 8th January 2015 with a follow up on the same on 8th December 2016.

4. The Respondent in a letter dated 5th November 2018 informed the Appellant that as per audit findings, its application to be allowed to claim investment deduction is not supported by the conditions set out in Paragraph 5 of the Second Schedule of the Income Tax Act, No. 470 of Kenya’s Laws (hereinafter ‘ITA’).

5. The Appellant wrote another follow up letter to the Respondent on 20th December 2021 on the same issue.

6. The Respondent communicated to the Appellant through a letter dated 29th July 2022 stating that it is not qualified for capital deduction.

7. The Appellant then objected to this disqualification in letters dated 26th August 2022 and 11th November 2022.

8. The Respondent communicated to the Appellant vide a letter dated 18th November 2022 saying that there is no tax decision to which they could proceed to lodge an objection, given that the letter dated 29th July 2022 was simply a detailed response to its application.

9. The Appellant being dissatisfied with the Respondent’s response contained in the 18th November 2022 letter lodged this Appeal on 19th December 2022 and filed on 20th December 2022.

The Appeal 10. The Appellant in its Memorandum of Appeal filed on 20th December, 2022 claims that it is qualified for capital deduction under Schedule Two of the ITA.

The Appellant’s Case 11. The Appellant case is premised in its Statement of Facts filed on 20th December 2022.

12. That it commenced operations in 2006 year of income, and operates from its own premises located at Karen on LR No. 23397 /3 Nairobi.

13. That the Appellant applied for capital deduction in the year 2015 and made other follow ups thereafter.

14. By the year 2015 when the application for capital deduction was made by it, there were no specific capital deductions with reference to hospitals in particular. That the law allowing commercial building allowance was introduced under Finance Act.No.8 of 2009 amending ITA, 2nd Schedule by introducing Paragraph l(ee) and 51l) (ff). It was the Finance Act, 2020 that specifically provided for capital deduction on hospital buildings.

15. The Respondent’s letter of 29th July 2022 declined the application for capital deduction after referring to the Appellant’s application of 20th December 2021.

16. That an objection was raised on 26th August 2022 justifying the qualification of the Appellant to the claimed capital deduction.

17. The Respondent did not act on the objection as required by Section 51(11) Tax Procedure Act, No. 29 of 2015 (hereinafter ‘TPA’) and that the Respondent failed and or declined to act on the objection within 60 days.

18. The Respondent, after pressure and follow up by the Appellant responded on 18th November 2022 but emphasized that:-“this is a response under Section 51 (4) of the TPA and not an objection decision under Section 51(8) of the TPA...."

19. That the contents of the letter of 18th November, 2022 served the purpose of an objection decision and hence this is a tax Appeal.

20. That the Appellant having commenced business in 2006 and the application for capital deduction having being made in on 8th January, 2015 under the repealed Section 90 (i) of the ITA, made the application relevant under Section 31 of TPA.

21. The Appellant qualified for capital expenditure on construction of the hospital building and machinery mainly the maternity, general wards, pharmacy, theatre, ICU's, HDU's, doctor’s examination rooms and administration office under industrial building under commercial building allowances, Paragraph 5(1) (ff) and 1 (i) (ee) or commercial building allowances under Paragraph 6A of Second Schedule (repealed) to the ITA.

22. That commercial buildings under Paragraph 5(i)(ff) was not defined and so the hospital building could fit into the claim by a hospital building.

23. The claim for capital deduction in 2015 was to cover period from 1st January, 2010 when the amendment to the Second Schedule came to force.

24. That under Paragraphs 5(i)(F) and 5(i)(ff), the Appellant qualified for industrial building allowance as the hospital premises were used as hospital and that there were water, road and sewerage services within the facility as became by law, effective 1st January, 2010.

25. The Appellant’s application in 2015 was seeking to amend 2010 to 2013 tax returns given the amendment of 1st January, 2010.

26. That the TPA became effective on 19th October, 2010 after its application under Section 90 of the ITA, in which case there was provision to amend 2010 to 2013 tax returns as Section 90 provided for seven (7) years backwards room to amend return under Section 73(2)(a) on a self-assessment under Section 52 B.

27. The industrial building allowance claim is based on "any year of Income" where the building is used and not "first year of use".

28. That in the spirit of the Second Schedule of the ITA, the Appellant qualified for the deduction for any year of income in which the building is so used irrespective of when it was first used.

29. The capital expenditure qualifying for deduction is Ksh. 762,384,615. 00 as contained in the last architectural certificate issued.

30. That Paragraph 5(l)(ff)(repealed), the hospital buildings was/is used for commercial purposes and the paragraph reads as follows:-“industrial building means a building is used as a commercial building "given the fact that running a hospital is a business activity ..." any trade, profession or vocation and every manufacture, adventure and concern in the nature of trade .... ".

31. That Paragraph - 5(i)(ff) recognizes hospital buildings as industrial buildings which qualify for capital allowance under Paragraph 1(i)(ee) at 25% of the capital expenditure incurred as per Finance Act No. 8 that became operation on 1st January, 2010.

32. That based on Paragraphs 5(i) (ff) and I (l) (ee) of ITA, Second Schedule, the Applicant qualified for Industrial building allowance at 25% of Ksh.762,85,515. 00 every year for four years.

33. That in the circumstance and facts of Commissioner of Domestic Taxes vs Sony Holdings Ltd (2021) eKLR were applicable in this particular case

Appellant’s Prayer 34. The Appellant’s prayer was for the Orders that:-a.The Tribunal sets aside the contents of the Respondent’s letter dated 18th November, 2022 and allow for capital deduction on the hospital building.

The Respondent’s Case 35. The Respondent in its Statement of Facts filed with the Tribunal on 20th January 2023 stated as hereunder.

36. The Appellant constructed a four-storey building between 2003 and 2006 which houses maternity, pharmacy, theatres, wards, Intensive Care Unit, High Dependency unit, examination and administration offices.

37. The cost of construction and equipment as per the Appellant's audited accounts for 2007 was Kshs. 762,384,515. 00 and Kshs. 356,209,825. 00, respectively.

38. The Appellant applied for leave to claim capital deduction on the hospital building cost under the now repealed Second Schedule of the ITA on 8th January 2015.

39. That by a detailed response letter dated 29th July 2022, the Respondent, informed the Appellant that it did not merit the capital deductions for different reasons.

40. The Appellant considered the communication as a tax decision which was to be replied by an objection, and lodged an objection application dated 26th August 2022 and noted that the Respondent failed to respond to its ‘objection application’ within 60 days and wrote to the Respondent on 11th November 2022 following up on reasons for the lack of response.

41. The Respondent replied to the Appellant's letter dated 11th November 2022 by a letter dated 18th November, informing the Appellant that the communication dated 29th July 2022 was not a decision subjectable to an objection application but was a detailed response to the inquiry on whether the Appellant could apply for the capital deductions.

Respondent’s Prayers 42. The Respondent’s prayers were for the Honorable Tribunal to find;a.That the Respondent’s detailed response to the Appellant's enquiry on whether it could claim capital deductions was sound in law.b.That this appeal be hereby dismissed with costs to the Respondent as the same is without merit,

Parties’ Written Submissions 43. The Appellant in its Written Submissions dated 15th March, 2023 and filed on 16th March 2023 submitted the hereunder.

44. The Appellant averred that the main ground of appeal is that the Respondent failed and/or refused to amend returns to allow for capital deduction in the tax computation of the Appellant under the Second Schedule (repealed) of the ITA. The said Schedule allows deduction of the capital cost of the hospital building and equipment against the profits of the Appellant with a view to reducing overall Corporation tax as an incentive to invest.

45. The Appellant contended that the capital deduction on the hospital building is allowable under progressively developed and amended pieces of statutes within the Second Schedule of the ITA.

46. The Appellant averred that it applied for correction of its self-assessment returns for 2010 to 2013 in accordance with Section 90 (repealed) of the ITA on 8th January, 2015. However, the Respondent did not act on it until the repeal of the above provision by the TPA which came into effect on the 19th February, 2016.

47. The Appellant submitted that it agreed with the Respondent that, since the matter was not concluded before the effective date of the TPA, under the transition provision Section 113 of the TPA, the issue would be handled under the new law.

48. The Appellant further submitted that Section 31 (4) of the TPA provided that amendments to self-assessment returns would be statutorily carried out within five years of the date of self-assessment returns which is a departure from the seven years stipulated in the repealed Section 90 of the ITA.

49. The Appellant asserted that it took issue with the Respondent since its application was for periods beyond the statutory period of five years provided in the new law, based thereof, they were to re-apply within the said period under Section 31 (2) of the TPA and since it did not do so prior to expiry of the timelines.

50. The Appellant stated that the Respondent misinterpreted the law and in contrast with Section 23 of the Interpretations and General Provisions Act (IOPA) which provides as follows:-‘(3) Where a written law repeals in whole or in part another written law, then, unless a contrary intention appears the repeal shall not-(a)revive anything not in force or existing at the time at which the repeal takes effect; or(b)affect the previous operation of a written law so repealed or anything duly done or suffered under a written law so repealed; or(c)affect a right; privilege, obligation or liability acquired, accrued or incurred under a written law so repealed; or(d)affect penalty, forfeiture or punishment incurred in respect of an offence committed against a written law so repealed; or(e)affect an investigation, legal proceeding or remedy in respect of a right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid, and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed, as if the repealed written law had not been made.’

51. The Appellant averred that it waited for the Respondent to provide it with guidance from the date of its application in January of 2015 and which finally came through its letter of 29th July, 2022.

52. The Appellant further submitted that instead of the Respondent admitting it was at fault for not responding to its application letter within 30 days from the date of the commencement of the TPA as provided for under Section 31(3) of the TPA, endeavored to escape mistakes it committed by not complying with the timelines provided in law. The said Section provides that:-“(3)Where an application has been made under subsection (2), the commissioner may-(a)amend the self-assessment; or(b)refuse the application,And the commissioner shall notify the tax payer in writing of the decision within thirty days of receiving the application.”

53. The Appellant averred that by the time the Respondent finally acted on its application in July, 2022, the Respondent was already statutorily time barred as it had taken more than seven years to act instead of effective date of the TPA provisions, which was the 19th of January, 2016

54. The Appellant submitted that on the issue of their application being time barred by virtue of the five-year rule provided as averred by the Respondent, it was the responsibility of the Respondent to provide feedback on the fate of its application in accordance with Section 31(3) of the TPA by either amending its returns or refusing its application notwithstanding the timelines.

55. The Respondent in its written submissions filed on 26th April 2023 submitted as hereunder.

56. The Respondent submitted that this was a case in which the Appellant on 8th January 2015 and 8th December 2016 sought guidance on the deductibility of capital allowances in relation to a hospital construction completed in 2006.

57. The Respondent averred that the said guidance was issued on 5th November 2018 following an in-depth audit that started on February 2017, and that no objection was preferred against those findings by the Appellant.

58. The Respondent submitted that in a letter dated 29th July 2022, it prepared a chronology of events, clearly reminding the Appellant that its application had been disallowed in 2018.

59. The Respondent argued that the issues for determination are:a.Whether a proper appeal can be made against its letter dated 18th November 2022. b.Whether the arguments relating to the disallowance of capital allowance can be challenged in the current Appeal.c.Whether the Appellant is entitled to capital deductions which were disallowed in the decision of 5th November 2018.

60. The Respondent submitted that the issue of capital deduction prior to 2010 was fully dealt with by the High Court in HCITA No. 52 of 2020: Commissioner of domestic taxes vs Sony Holdings. The Respondent sought to rely on this Judgement which is a different judgement from the one attached by the Appellant which is HCITA No. E042 of 2020 between same parties.

Preliminary Objection by the Respondent 61. The Respondent raised a Preliminary Objection dated 29th March, 2023 and filed on 31st March, 2023 challenging the jurisdiction of the Tribunal on the grounds that;-i.That the Appeal herein against a correspondence, is barred in law as the same is not an appealable decision pursuant to Section 52(1) of the TPA.ii.That the letter of 18th November, 2022 for which the Notice of Appeal was lodged does not contain any decision for which an appeal can lie.iii.That the 18th November letter merely stated that the 29th July letter was not a tax decision for which an objection can be preferred, neither was it an objection decision.

Issues For Determination 62. The Tribunal having carefully considered the parties’ pleadings, documentation and the Submissions notes that the issues that call for its determination are as follows:-a.Whether the Preliminary Objection by the Respondent is merited.b.Whether the Appellant is qualified for capital deduction under Schedule Two of the ITA.

Analysis And Determination Whether the Preliminary Objection by the Respondent is merited. 63. The Respondent emphasized that its communication in the letter dated 29th July 2022 to which the Appellant objected to was not a tax decision which is subjectable to an objection. That rather, it was a detailed letter of response to the Appellant's letter which was titled "application for guidance on the applicable capital allowances on capital expenditures on the construction of hospital building, acquisition and installation of equipment." That the letter of 18th November 2022 by the Respondent was a reiteration of the previous letter dated the 29th July 2022.

64. Section 51(1) of the TPA provides that a taxpayer may object to a tax decision in the following terms:“A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.”

65. A tax decision is defined under Section 3 of the TPA as follows:“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;”

66. The Appellant argued that, any action rendered by the Respondent to its application is a 'tax decision' and falls under subparagraph (d) above and is consequently, a matter subject to an objection as provided for under Section 51 (1) of the TPA.

67. The Tribunal wishes to delve into the communication between the Appellant and the Respondent, and wishes to analyze the three letters, namely; the letters dated the 5th November 2018, the 29th July 2022 and the 18th November 2022.

68. The Notice of Appeal lodged herein was in respect of the letter dated 18th November, 2022 which contained a single issue of reminding the Appellant that the letter of 29th July, 2022 was not tax decision.

69. The Tribunal notes that the Appellant in the Appeal had a single ground being:-“The Appellant qualify for capital deduction under schedule two of ITA and which the Respondent denied.”

70. The Tribunal is of the view that the decision on whether the Appellant is qualified for capital deduction or not was first made in the Respondent’s letter dated the 5th November 2018 and the Appellant never objected to the same.

71. The Tribunal deduces from the contents of the Respondent’s letter dated 29th July 2022 as repeated in the letter dated 18th November 2022 did not fall within any of the Sections listed in the provision defined under Section 3 of the TPA. It is the view of the Tribunal that the Appellant, if dissatisfied by the Respondent’s letter dated 5th November 2018 should have objected to it and lodged an appeal after issuance of the objection decision.

72. Section 2 of the TPA defines an appealable decision as thus:-“Appealable decision" means an objection decision and any other decision made under a tax law other than-(a)a tax decision; or(b)a decision made in the course of making a tax decision.”

73. The Appellant instead chose to Appeal against the Respondent's communication dated 18th November 2022 which was in itself not a decision but a reminder that the decision made on 29th July 2022 was not a tax decision in respect of which the Appellant could object and necessitate the Respondent to render an objection decision.

74. The Tribunal has the jurisdiction to hear appeals as per Section 52(1) of the TPA which provides as follows:“A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the TPA.’”

75. The Tribunal in the circumstances finds that it is unable to hear and determine the Appeal on its merit for want of an appealable decision. The Supreme Court has expressed itself on the issue of jurisdiction in Samuel Kamau Macharia & another v Kenya Commercial Bank Ltd & another (supra) wherein the Court held that:-“(68)A Court's jurisdiction flows from either the Constitution or legislation or both. Thus, a Court of law can only exercise jurisdiction as conferred by the constitution or other written law. It cannot arrogate to itself jurisdiction exceeding that which is conferred upon it by law."

76. Accordingly, the Tribunal finds that this Appeal is improper in law and the Preliminary Objection by the Respondent is merited.

Whether the Appellant is qualified for capital deduction under Schedule Two of the ITA. 77. Having determined the first issue and pronounced that the Appeal is not properly before the Tribunal. the Tribunal will not delve into this second issue as the same has been rendered moot.

Final Decision 78. On the basis of the foregoing analysis the Tribunal finds the Appeal to be incompetent and unsustainable in law and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

79. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2023. ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALAMEMBERCHRISTINE A. MUGAMEMBERGEORGE KASHINDIMEMBERSPENCER. S. OLOCHIKEMEMBERMOHAMED A. DIRIYEMEMBER