Case ID:168093

AM Bahaji & Company Limited v Kenya Ports Authority [2020] eKLR

Case Metadata

Case Number:

Civil Suit 410 of 2002

Parties:

AM Bahaji & Company Limited v Kenya Ports Authority

Date Delivered:

24 Nov 2020

Case Class:

Civil

Court:

High Court at Mombasa

Case Action:

Ruling

Judge(s):

Dorah O. Chepkwony

Citation:

AM Bahaji & Company Limited v Kenya Ports Authority [2020] eKLR

Court Division:

Civil

County:

Mombasa

Case Summary:

Decretal sums are generally not a form of income that is subject to tax deductions.

AM Bahaji & Company Limited v Kenya Ports Authority [2020] eKLR

Civil Suit 410 of 2002

High Court at Mombasa

DO Chepkwony, J

November 24, 2020

Reported by Beryl Ikamari

Civil Practice and Procedure

- decree - satisfaction of decrees -whether a decretal sum awarded under the terms of a consent letter filed in court, could be subjected to tax deductions which were not provided for in the consent letter.

Taxation Law

- income tax - withholding tax - whether a decretal sum was a form of income which could be the subject of withholding tax deduction, where the decree of the court did not provide for such a tax deduction.

Brief facts

The applicant applied for a stay of execution. The grounds for the application were that after judgment had been entered, the parties negotiated and agreed on a decretal sum of USD.1,136,552.12, payable by the defendant to the plaintiff, as per the terms of a consent letter that had been filed in court. The parties also agreed to a sum of Kshs.2,137,200/= payable as costs to the plaintiff’s advocate.

The applicant (who was also the defendant) stated that it paid the amount due save for the fact that it deducted USD.104,419.97 as withholding tax that was payable to the Kenya Revenue Authority. The plaintiff filed a replying affidavit stating that the decree had not been settled fully because the consent amount agreed on by the parties was not subject to deductions. The plaintiff however, conceded that a deductible discount of USD22,000 had been given to the defendant.

Issue

s

Whether a decretal sum awarded by virtue of a consent letter filed in court could be subjected to a tax deduction not reflected in the consent letter.

Whether a decretal sum was a form of income that could be subjected to taxation.

Held

The Black's Law Dictionary, 8

th

Edition, defined withholding tax as a portion of income tax that was subtracted from salary, wages, dividend or other income before the earner received payment. That definition as read together with section 3 of the Income Tax Act, did not lead to the conclusion that a court decree was a taxable item. If the intendment of the income tax law was to have a court decree as a taxable item, the legislature would have provided for that clearly. A court decree was not a form of income.

Income under the Black's Law Dictionary was defined as the return in money from one’s business, labour, or capital invested. Therefore, a decretal sum was not income.

There was no evidence that the deducted sum of money was paid to the Kenya Revenue Authority on July 20, 2020 as alleged.

The plaintiff was at all times entitled to an amount of USD.1,136,552.12 being the Decretal amount agreed on inter parties by a Consent filed and adopted as a Judgment of the court on May 13, 2020. If there was an oversight where in statutory deductions had been overlooked, the same should have been suggested, proffered and negotiated.

The applicant was under no obligation to retain portions of the decretal sum and remit the same to the Kenya Revenue Authority. The decretal sum was not an income for purposes of withholding tax under the Income Tax Act. The deductions made on account of withholding tax were illegal and unsupported by the law.

Application dismissed with costs.

Extract:

Cases

East Africa

1.

Brooke Bond Liebig (T) Ltd v Mallya

[1975] EA 266 – (Explained)

2.

Diamond Trust Bank Kenya Ltd v Plt and Panels Ltd

[2004] EA 23 – (Explained)

3.

Manyara, Ibrahim v Registered Trustees of Agricultural Society of Kenya

Cause 1101 of 2012; [2014] eKLR – (Explained)

4.

Ocean Freight (E.A) Limited v Commissioner of Domestic Taxes

Income Tax Appeal 13 of 2017; [2020] eKLR– (Explained)

United Kingdom

Cape Brandy Syndicate v IRC

[1921] 1KB 64; 12 Tax Cas 358 – (Explained)

Statutes

East Africa

1. Income Tax Act (cap 470) sections 3(1); 4; 5; 6; 10 – (Interpreted)

2. Income Tax (Withholding Tax) Rules, 2001 (cap 470 Sub Leg) In general – (Cited)

Texts & Journals

Garner, BA., (Ed) (2004)

Black’s Law Dictionary

London: Thomson West 8th Edn

Advocates

None mentioned

Case Outcome:

Application dismissed with costs

Disclaimer:

The information contained in the above segment is not part of the judicial opinion delivered by the Court. The metadata has been prepared by Kenya Law as a guide in understanding the subject of the judicial opinion. Kenya Law makes no warranties as to the comprehensiveness or accuracy of the information

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA

AT MOMBASA

CIVIL SUIT NO. 410 OF 2002

A.M. BAHAJI & COMPANY LIMITED.......PLAINTIFF

VERSUS

KENYA PORTS AUTHORITY....................DEFENDANT

RULING

1. This

Ruling

determines the Defendant’s/Applicant’s

Notice of Motion

Application dated

6

th

July, 2020

. The application seeks for:-

a. Spent;

b. There be a Stay of Execution of the Decree herein pending the hearing and determination of this application inter-partes;

c. The suit be marked as compromised and settled;

d. The Costs of this application be provided for.

2. The application is premised on the grounds stated on its face and is supported by an

Affidavit

sworn by

Turasha J. Kinyanjui

together with annextures thereto.

3. In her

Supporting Affidavit

, the Applicant deposed that

Judgment

was entered for the Plaintiff/Respondent as against the Defendant/ Applicant on

30

th

October, 2019

. That following subsequent negotiations between the parties, it was agreed that the Decretal amount payable to the Plaintiff by the Defendant would be

USD.1,136,552.12

in terms of a

Consent Letter

filed in court on the

13

th

May, 2020

and an additional

Kshs.2,137,200/=

payable as costs to the Plaintiff’s advocate.

4. According to the Defendant/Applicant it remitted the said sums to the Plaintiff through its advocate on

4

th

May, 2020

save for

USD.104,419.97

deducted on interest as

Tax Payable

to

Kenya Revenue Authority

pursuant to the provisions of

Section 10

of the

Income Tax Act

. It is submitted that the Defendant has an obligation in law to make a withholding tax deduction and the Plaintiff/Respondent should not insist that the amount of

USD.104,419.97

is still due and outstanding.

5. In response to the application, the Plaintiff filed a

Replying Affidavit

sworn by its Director,

Abdi Mohamed Bahaji

. He deponed that the Consent amount that was agreed on by the parties was not subject to any deductions. Therefore it cannot be said that the Decree is fully discharged because the Plaintiff has not paid an amount of

USD104,419.97

plus accrued interest of

USD9,404.97.

6. According to the Plaintiff, had the parties intended the amount to be deducted, nothing could have been hard than stating so in the Consent. The only deduction conceded to by the parties was for

USD220,000/=

discount to the Defendant. Be that as it may, the Plaintiff was of the view that since

27

th

April, 2020

to-date, the Defendant has not shown any evidence that indeed it remitted any amount to

Kenya Revenue

Authority

as alleged.

7. It is further averred that the subject amount in the Decree was awarded as a

Judgment

of the court and cannot be subject to deduction under the provisions of

Section 10

of the

Income Tax Act

. It follows that the allegations by the Defendant that it will remit the deducted amount as at

20

th

July, 2020

is unsubstantiated and cannot hold.

8. The application was canvassed by way of written submissions. Both parties obliged by filing their respective submissions. The Defendant’s/ Applicant’s submissions were filed on

7

th

September, 2020

whilst the Plaintiff filed its on

10

th

September, 2020

.

The Applicant’s Submissions

9. The Defendant/Applicant submitted that the interest the Respondent was entitled to under the Decree falls under

Section 10

of the

Income Tax Act

2010

as well as under the

Income Tax (Withholding Tax) Rules, 2001

. Therefore the Defendant is obliged to deduct tax from payment made to the Plaintiff and remit the same to

Kenya Revenue Authority

on account of the Plaintiff.

10. By virtue of

Clause 5(h)(iii)

of the

Third Schedule

to the

Income Tax Act

the Defendant submits that it is qualified to deduct

Withholding Tax

at the rate of

15%.

In support of the submissions, reliance was placed on the case of

Ocean Freight (E.A) Limited…Vs… Commissioner of Domestic Taxes [2020]eKLR,

where the Court cited with approval the decision of

Rowlatt J. in Cape Brandy Syndicate…Vs…I.R.C 1KB 64, 71

. The Court held thus:

“… in a taxing statute one has to look at merely what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing implied. One can only look fairly at the language used”

The Respondent’s/Plaintiff’s Submissions

11. The Plaintiff/Respondent on its part submitted that the Defendant was in breach of the terms of the Consent by purporting to unilaterally deduct taxes on the Decretal sum. In any event, according to the Plaintiff/Respondent, the Decretal sum is as a result of a

Judgment

of the court and cannot be subjected to tax deductions.

12. The Plaintiff further submits that the suit cannot be said to have been compromised because the Defendant has not fully discharged its payment obligations. It is further submitted that the Consent recorded by the parties can only be set aside on grounds of fraud or collusion and therefore the Defendant is bound to honour the terms of the Consent. In support of its submissions the Applicant relied on the cases of

Ibrahim Manyara… Vs…Registered Trustees of Agricultural Society of Kenya [2014] eKLR

,

Brooke Bond Liebig (T) Ltd…Vs…Mallya [1975]E.A 266

and

Diamond Trust Bank Kenya Ltd…Vs…Plt and Panels Ltd

[2004] E.A 23

.

Analysis and Determination

13. Having set out the parties’ respective stands as above, I am of the considered view that the borne issue for determination from the onset is as to whether the Defendant/Applicant is legally entitled to subject taxation on the Decretal sums awarded by virtue of a

Consent Letter

signed by both parties and filed on the

13

th

May, 2020

. And secondly, whether an order that his suit be marked as compromised and settled should issue.

14. The Applicants case is that it is obliged under law and especially

Section 10

of the

Income Tax Act

, to make deduction on the interest or any other income earned by the Plaintiff then remit the same to

Kenya Revenue Authority

. Emphasis was laid on the definition of

‘interest’

under the Act as

“interest payable in any manner in respect of a loan, deposit,

claim

or other right or obligation”.

The Defendant relied on

Clause 5(h)(iii)

of the

Third Schedule

to the

Income Tax Act

, to posit that it was obliged to deduct interest at rate of

15%

.

15. The argument put forth by the Plaintiff/Respondent in response seems to me to be two-thronged. One, that if parties intended that deductions on tax to be made, they would have stated so in the Consent. Secondly, that Court Decrees are not to be subjected to deduction. The Respondent buttressed the assertion by an excerpt from the case of

Ibrahim Manyara…Vs… Registered Trustees of Agricultural Society of Kenya (Supra).

16. I will begin by considering

Section 3(1)

of the

Income Tax Act

which provides as follows:

“Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”

17. The

Income Tax Act

provides for taxation of various categories of income. For instance, the Act provides for the taxation of income from businesses

(Section 4),

income from employment

(Section 5),

income from the use of property

(Section 6)

and income from management or professional fees, royalties, interest and rents

(Section 10).

18. It is not in dispute that on

13

th

May, 2020

the parties entered into a

Consent Judgment

for Decretal amount of

USD.1,136,552.12

and further

Kshs.2,137,200/=

to account for the Plaintiff’s Advocate’s costs. The question which then arises is whether the agreed Decretal amount is an income to be subjected to taxation as envisaged under the

Income Tax Act

. Was the Defendant justified to withhold tax as it did?

19. In

Black's Law Dictionary

,

8th Edition

,

“withholding tax”

is defined as

“a portion of income tax that is subtracted from salary, wages, dividends, or other income before the earner receives payment”.

20. Based on this definition in the

Black's Law Dictionary

as read together with

Section 3

of the

Income Tax Act,

under no circumstances does any of the definitions include a Decree of a court as a taxable item under the

Income Tax Law

. If the intendment of the

Income Tax Law

was to have a Decree of court taxable under its provision, the legislature would have come out clearly and provided for this.

21. To that extend, I agree with the decision in the case of

Ocean Freight (E.A) Limited….Vs….Commissioner of Domestic Taxes[2020] eKLR (supra)

to the extent that, in a Taxing Statute, one has to look at merely what is clearly said. There is no presumption as to what a

“withholding tax”

is and nothing is to be implied. A court Decree or interest arising thereof is not mentioned as a form of income and this court cannot presume the contrary.

22. Considering similar facts under similar circumstances, the court in the case of

Ibrahim Manyara…Vs…Registered Trustees of Agricultural Society of Kenya(ASK) [2014]eKLR

,

had the following to say;

“…His, I suspect was in avoidance of creating confusion by subjecting decrees of court to taxation. This was partly because these are in most cases amorphous amounts and figures that would not necessary be in law deemed income. For example, would an amount of compensation in damages arising out of a fatal accident claim be deemed income accruing to the aggrieved or injured property? I guess not.”

23. Perhaps to shine more light, the court outlines what would amount to an ‘

income’

. The same is defined under the

Black’s Law Dictionary

as

“the return in money from one’s business, labour, or capital invested”.

Therefore, it cannot be gainsaid that a Decretal amount is a form of income and it would be a travesty to include it as income to fit within the gloves of the Applicant. This is why I agree with the finding in the case of

Ibrahim Manyara…Vs…Registered Trustees of Agricultural Society of Kenya

(Supra)

that

“The offshoot of my finding on this subject is that

there is no known law that subjects decrees of court to taxation

. The Income Tax Act aforecited is silent on this and we should so far trend that path. If the tax man wishes to rethink his position on this, we shall not disallow the same.”

24. There is also no evidence that the Applicant has remitted the amount deducted despite alleging that the remittance was to be done on

20

th

July, 2020

under the

Affidavit

sworn in support of the application. Clearly there is some suspicion on the part of the Plaintiff/Respondent that the amount deducted might not end up with the taxman and that it would be safer with the Decree Holder (the Respondent herein) as only then would the trail on the Decretal sum will be easily identified.

25. I therefore find that the Respondent was at all times entitled to an amount of

USD.1,136,552.12

being the Decretal amount agreed on

inter parties

by a

Consent

filed and adopted as a

Judgment

of the court on

13

th

May, 2020

. If it was an oversight on the part of the Applicant not to factor in any statutory deductions, then the court is of the view that the same should have been suggested, proffered and negotiated as was the case in the earlier Consent Order.

Conclusion

26. It is therefore the finding of this Court that the Applicant was under no obligation to retain portion(s) of the subject payments and to remit the same to the

Kenya Revenue Authority

on account of

Withholding Tax

since the Decretal Sum does not amount to an

“income”

for purposes of

withholding tax

under the

Income Tax Act

.

27. In the resultant, I direct that any deductions made on account of

Withholding Tax

by the Applicant is not supported by any law and therefore the same is illegal and that any sum so deducted ought to be refunded to the Respondent within

14 days

of the date of this

Ruling.

The present application is therefore dismissed with costs.

It is so ordered.

DATED, SIGNED

and

DELIVERED

at

MOMBASA

on this

24

th

day of

November, 2020.

D. O. CHEPKWONY

JUDGE

In view of the declaration of measures restricting court operations due to the

COVID-19

pandemic and in light of the directions issued by His Lordship the Chief Justice on

15

th

March 2020,

this Ruling has been delivered to the parties online with their consent. They have waived compliance with

Order 21 Rule 1

of the

Civil Procedure Rules

which requires that all Judgments and Rulings be pronounced in open Court.

D. O. CHEPKWONY

JUDGE