High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)
Equity Group Holdings Limited v Commissioner of Domestic Taxes
Equity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020)  KEHC 25 (KLR) (Commercial and Tax) (23 August 2021) (Judgment)
The Duty of the Courts to Administer Justice Without Undue Regard to Procedural Technicalities Also Applied when Interpreting Substantive Provisions of Law.
On January 2013, the Banking Act was amended to recognize non-operating holding companies and banking groups. Pursuant to the said amendments, particularly sections 9 and 13 of the said Act, Equity Bank Limited, the appellant in the 1st appeal opted to set up a non-operating holding company. After completion of the restructuring exercise, the Commissioner of Domestic Taxes conducted a review of the appellant's business re-organization transaction falling within the period 2014 2015 and determined that Capital Gains Tax (CGT) arose from the transaction. It subsequently issued a tax demand to the appellant for payment of CGT relating to the transfer of net banking assets from EBL to EBKL amounting to Kshs. 330,858,696/= inclusive of penalties and interest. A meeting held on November 2, 2016 between the parties failed to resolve the matter.
On November 9, 2016, the appellant filed a notice of objection with the respondent objecting to the entire assessment of Kshs. 330,858,696. The respondent reviewed the objection and adjusted the tax demand to Kshs. 820,406,196 which was confirmed vide the respondent's letter dated January 9, 2017 being the objection decision. Aggrieved by the objection decision, the appellant appealed to the Tax Appeals Tribunal (TAT) on grounds that the objection decision was invalid. The respondent urged the TAT to find that the respondent's objection decision in January 9, 2017 met the provisions of Section 51 of the Tax Procedures Act (TPA).The TAT allowed the appeal and set aside the respondents Capital Gains Tax Assessment amounting to Kshs. 820,406,196 inclusive of penalties and interests.
Aggrieved, the appellant in the 1st appeal, Equity Holdings Group, sought for the decision of the TAT to be set aside on grounds that the TAT erred in law by admitting the respondents objection decision even though the decision on the tax objection was issued outside the statutory period of 6 months; that the decision of the TAT was wrong in law and a misinterpretation of section 51 of the Tax Procedures Act (TPA). Also aggrieved, the appellant in the 2nd appeal, Commissioner of Domestic Taxes, sought for the decision of the TAT to be set aside on grounds that the TAT erred in law and misdirected itself in finding that the Registrar's role, under Section 9 (8) of the Banking Act was simply limited to carry out endorsement thus failing to establish when a transfer took place and in finding that there was no gain accrued on the transfer of property whereas the formula provided by the respondent to the appellant showed a gain of Kshs. 34,590,905,615. They sought for the Capital Gains Tax assessment of Kshs.820,406,196 by the Commissioner of Domestic Taxes be upheld.
- When did the need for interpretation of statute arise?
- What rules were applicable in interpreting a taxing statute?
- What was the difference between procedural and substantive law?
- Whether the duty of the courts to administer justice without undue regard to procedural technicalities also applied to courts when interpreting substantive provisions of law.
- Whether the Registrar of Companies/Registrar of Titles role in amalgamations and transfer of assets and liabilities was limited to carrying out an endorsement of change of record and was not an indicator of when the transfer took place.
- Whether the Tax Appeals Tribunal had the discretion to extend the time for the Commissioner of Domestic Taxes to issue a decision on an objection by a tax payer against a taxing decision.
- Whether an objection by a tax payer against a taxing decision stood allowed as a matter of law the moment the Commissioner of Domestic Taxes failed to render his decision within the statutory period of 60 days.
Relevant provisions of the law
Tax Procedures Act, Act No. 29 of 2015.
51. Objection to tax decision
(11) The Commissioner shall make the objection decision within sixty days from the date of receipt of
(a) the notice of objection; or
(b) any further information the Commissioner may require from the taxpayer,
failure to which the objection shall be deemed to be allowed.
- The need for interpretation only arose when the words used in the statute were on their own terms ambivalent and did not manifest the intention of legislature. Similarly, rules of interpretation came into play only if there was doubt with regard to the express language used. The overriding purpose of construction of any statutory provision was to ascertain the intention of the legislature and the primary role was to determine the same by reference to the language used.
- The dominant purpose in construing a statute was to ascertain the intention of the legislature as expressed in the statute, by considering it as a whole and in its context so that the intention, and therefore, the meaning of the statute, was primarily to be sought in the words used in the statute itself, which had to, if they were plain and unambiguous be applied as they stood. The object of all interpretation was to discover the intention of Parliament, but the intention of Parliament had to be deduced from the language used.
- A statute was an edict of the Legislature and the conventional way of interpreting or construing a statute was to seek the intention of its maker. A statute was to be construed according to the intent of them that made it and the duty of judicature was to act upon the true intention of the legislature. If a statutory provision was open to more than one interpretation the court had to choose the interpretation which represented the true intention of the legislature, the legal meaning of the statutory provision. The intention of the legislature assimilated two aspects: -
- in one aspect it carried the concept of meaning, being, what the words meant.
- in another aspect, it conveyed the concept of purpose and object or the reason and spirit pervading through the statute.
- The intention of Parliament could not prevail if the language of the statute did not support that view. The object of the statute had to be gathered from language and not on what one believed or thought.
- The art of correct interpretation would depend on the ability to read what was stated in plain language, read between the lines, read through the provision, examining the intent of the legislature and called upon case laws and other aids to interpretation. However, rules of interpretation were applied only to resolve the ambiguities. The object and purpose of interpretation was to ascertain the intention of the law, as evinced in the statute. The key to the opening of every law was the reason and spirit of law. To be literal in meaning was to see the body and miss the soul. The judicial key to interpretation was the composite perception of the body and the soul of the provision.
- Wherever it was possible to do so, the provision in question had to be harmoniously construed by avoiding a conflict. A construction which reduced the statute to a futility had to be avoided. A statute or any enabling provision therein had to be so construed as to make it effective and operative. A liberal construction should be put upon written instruments, so as to uphold them, if possible and carry in to effect the intention of the statute. The provisions of two enactments had to be read harmoniously so as not to subject them to any strained construction giving rise to an artificial inconsistency or repugnance. Every clause of a statute should be construed with reference to the context and other clauses of the statute so as, as far as possible, to make a consistent enactment of the whole statute.
- Parliament in its wisdom deployed the word shall twice in section 51(11) of the Tax Procedures Act. The classification of statutes as mandatory and directory was useful in analyzing and solving the problem of the effect to be given to their directions. There was a distinction between a case where the directions of the Legislature were imperative and a case where they were directory. The real question in all such cases was whether, a thing, had been ordered by the Legislature to be done, and what the consequence was, if it was not done. The general rule was that an absolute enactment had to be obeyed, or, fulfilled substantially. Some rules were vital and went to the root of the matter, they could not be broken; others were only directory and a breach could be overlooked provided there was substantial compliance.
- It was the duty of courts of justice to try to get to the real intention in legislation by carefully attending to the whole scope of the statute. The question as to whether a statute was mandatory or directory depended upon the intent of the legislature and not upon the language in which the intent was clothed. The meaning and intention of the Legislature had to govern, and that was to be ascertained not only from the phraseology of the provision, but also by considering its nature, its design and the consequences which would follow from construing it in one way or the other.
- The word shall when used in a statutory provision imported a form of command or mandate. It was not permissive, it was mandatory. The word shall in its ordinary meaning was a word of command which was normally given a compulsory meaning as it was intended to denote obligation. Shall was used to express a command or exhortation or what was legally mandatory.
- Section 51(11) of the Tax Procedures Act (TPA) was couched in mandatory terms. In a taxing statute one had to look merely at what was clearly said. There was no room for any intendment. There was no equity about a tax. There was no presumption as to a tax. Nothing was to be read in, nothing was to be implied. One could only look fairly at the language used. Where, however, the provisions were couched in language which was not free from ambiguity and admitted two interpretations, a view which was favourable to the subject should be adopted. The fact that such an interpretation was also in consonance with ordinary notions of equity and fairness would further fortify the court in adopting such a course.
- In construing fiscal statutes and in determining the liability of a subject to tax one had to have regard to the strict letter of the law. If the revenue satisfied the court that the case fell strictly within the provisions of the law, the subject could be taxed. If, on the other hand, the case was not covered within the four corners of the provisions of the taxing statute, no tax could be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter.
- The TAT rightly computed time and pronounced that the objection decision was rendered out of time. The objection decision was deemed to have been allowed. If the Commissioner did not render a decision within the stipulated period, the objection was deemed as allowed by operation of the law. The statute required that where the Commissioner had not made an objection decision within 60 days from the date the tax payer lodged the notice of objection, the objection was to be allowed. That meant that the issues that the tax payer had raised in the notice of objection would be accepted. In case of a tax assessment, it would be vacated.
- Section 51 (11) of the TPA was couched in peremptory terms. The decision was made after the expiry of 60 days, the TAT had no legal basis to proceed as it did and to invoke article 159(2) (d). There was no decision at all. The decision had ceased to exist by operation of the law. The provisions of section 51 (11) (b) had kicked in. The objection had by dint of the said provision been deemed as allowed. The TAT had no discretion to either extend time or to entertain the matter further. Discretion followed the law and a tribunal could not purport to exercise discretion in clear breach of the law.
- The TAT premised its decision on the provisions of article 159 (2) (d) of the Constitution which required courts to determine matters without undue regard to technicalities of procedure. On the face of a clear statutory dictate, the TAT could not term the express statutory edict as a matter of procedural technicality. That was a gross misapprehension of the law. Article 159 (2) (d) of the Constitution was not meant to oust express statutory provisions and to open a window for disregard of statutory requirements.
- The TAT fell into grave error when it failed to appreciate the difference between a procedural law and substantive law. Procedural law, also called adjective law was the law governing the machinery of the courts and the methods by which rights were enforced. Procedural law prescribed the means of enforcing rights or providing redress of wrongs. It comprised of rules about jurisdiction, pleadings, and practice, evidence, appeal, execution of judgments, representation in court, costs, and other matters. Procedural law was commonly contrasted with substantive law, which constituted the great body of law and defined and regulated legal rights and duties. Thus, whereas substantive law would describe how two people could enter into a contract, procedural law would explain how someone alleging a breach of contract could seek the courts help in enforcing the agreement.
- Substantive law was a statutory law that dealt with the legal relationship between people or the people and the State. Therefore, substantive law defined the rights and duties of the people, but procedural law lay down the rules with the help of which they were enforced. The TAT manifestly erred in law by confusing substantive law with procedural law. Article 159(2) (d) of the Constitution talked about procedural technicalities. A statutory edict was not a procedural technicality. It was a law which had to be complied with. Parliament in its wisdom expressly and in mandatory terms provided the consequences of failing to render a decision with 60 days. The objection was deemed to be allowed. The appellants objection stood allowed as a matter of law the moment the Commissioner of Domestic Taxes failed to render his decision within the 60 days.