REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

COMMERCIAL AND ADMIRALTY DIVISION

MISCELLANEOUS SUIT NO. 285 OF 2015

KENYA REVENUE AUTHORITY……………………...…….EX-PARTE APPLICANT

VERSUS

JIMMY MUTUKU KIAMBA…………………..………….…………....RESPONDENT

RULING

1. The application before me was made pursuant to Section 96A of the Income Tax Act, as read with Sections 3 and 3A of the Civil Procedure Act.

2. The Applicant is the KENYA REVENUE AUTHORITY, whilst the Respondent is JIMMY MUTUKU KIAMBA.

3. The Applicant sought orders for the preservation of funds in some ten (10) specified bank accounts, which belong to the Respondent.  The said bank accounts are held at the following five (5) banks;

1. CFC STANBIC BANK LIMITED
2. CO-OPERATIVE BANK
3. STANDARD CHARTERED BANK
4. EQUITY BANK, and
5. GULF AFRICAN BANK LIMITED

4. Each of the last 3 banks above, have one account; the Co-operative Bank has 2 accounts; whilst 5 accounts are at the CFC Stanbic Bank.

5. The Applicant asked the court to prohibit the transfer, withdrawal, disposal of, or other dealing with the funds in the specified accounts, until there had been an assessment of the Respondent’s Income, for purposes of taxation.

6. In the alternative, the Applicant asked the court to impose terms on the Respondent, so that there was security available for the payment of such taxes as would be found to be payable by the Respondent to the Applicant.

7. The Applicant’s case was that the Respondent had deliberately omitted to declare Rental Income and other Business Income, for the purposes of taxation.

8. It is the Applicant’s position that the Respondent had been grossly un-declaring and paying taxes for the period between 2006 and 2014.

9. The nett result of the alleged understatement of income is said to have been a failure to tax the Respondent’s income.  Therefore, the Applicant now wished to assess the Respondent’s Income, with a view to issuing an appropriate Tax Assessment.

10. The Applicant expressed fear that if the Respondent’s funds were not preserved by an order of this court, the Respondent would frustrate the recovery of such taxes as may be ascertained to be payable by him.

11. Bearing in mind the fact that every person who was deriving income in Kenya had a Constitutional duty and responsibility to pay tax, the Applicant contended that justice and equity demand that the Respondent should pay his fair share of taxes.

12. The application was supported by the affidavit of CYRELL WANGUNDA, who is an Officer at the Kenya Revenue Authority.

13. CYRELL explained that the Kenya tax regime is based upon Self-Assessment, which relied on the full disclosure and good faith of individuals and companies when they were making their respective tax returns.

14. Therefore, the system was open to abuse by the persons supposed to pay tax.

15. CYRELL deponed that the Respondent was an employee of the NAIROBI COUNTY GOVERNMENT, where he worked as the CHIEF FINANCE OFFICER.

16. The Applicant made available to the court the tax returns filed by the Respondent, for the financial years between 2007 and 2013.

17. The Applicant also placed before the court, the particulars of the Respondent’s ten bank accounts, as well as the particulars of eight (8) real properties belonging to the Applicant.

The eight properties are located in the following areas;

1. BANDARI VILLAS SOUTH ‘C’
2. RUNDA
3. PRITT LANE COURTS
4. MUTHAIGA

18. The total value of the 8 properties was given as Kshs. 365.5 million.

19. According to the Applicant, based on the examination of the information and the documents provided by the ETHICS AND ANTI-CORRUPTION COMMISSION, the Respondent had under-paid his Income Tax by a sum amounting to Kshs. 98 million, for the financial years between 2010 and 2013.

20. The Applicant indicated to the court that the figure of Kshs. 98 million did not include the Tax payable by the Respondent for the period between 2006 and 2009.

21. It was the Applicant’s case that the Tax assessments for the period between 2006 and 2009 were still being reviewed by the Applicant, who intended to charge Tax on the income which had been previously undisclosed.

22. In answer to the case, the Respondent faulted the Applicant for having failed to serve him with a Notice demanding the alleged undeclared income. 

23. In any event, as far as the Respondent was concerned, there is a time-limit of 7 years, during which period the Kenya Revenue Authority could pursue a person for unpaid tax.

24. As the Applicant’s demand was being made in the year 2015, the Respondent held the view that any Tax relating to the period earlier than 2007 could not be recovered.

25. But the Applicant insists that the understanding of the Respondent was not comprehensive.  And, the court holds the view that the reasoning of the Applicant has some merits.  I so hold because there is no way that the Kenya Revenue Authority could possibly be expected to demand payment of Taxes calculable on income which it had not become aware about.

26. Each person makes a declaration of the Income he earns.  Based on that declaration, the Kenya Revenue Authority carries out an assessment of the Tax which is payable.

27. In this instance, the Respondent has been shown to have been declaring that he has earning little or nothing at all.

28. Based upon the Respondent’s said declarations, the Kenya Revenue Authority cannot have been expected to assess Tax which was out of line with what information the Respondent had provided.

29. In his Replying Affidavit, the Respondent has admitted that he owes Taxes amounting to Kshs. 17 million. 

30. Following that admission, the Applicant asked the court to immediately give authority to the Applicant to recover the sum of Kshs. 17,000,000/- from the Respondent’s bank accounts.

31. The Respondent confirmed his willingness and readiness to pay to the Applicant Kshs. 17,000,000/-, forthwith.  But he categorically rejects the Applicant’s attempts to claim the sum of Kshs. 98 million.  As far as the Respondent was concerned, the said sum of Kshs. 98 million consisted of Fraud Penalties, which the Applicant had imposed even without proving that it was payable.

32. In my considered view, the Respondent appears to be saying that even though he had declared that he was not earning any meaningful income, the Kenya Revenue Authority ought, by some miracle, to have been able to correctly assess the Tax payable by him.

33. The Respondent seems to also be saying that after the miraculous assessment of Tax payable by him, the Kenya Revenue Authority ought to have issued Demand Notices, requiring the Respondent to pay the assessed Tax.

34. Frankly, I am completely unable to appreciate how the Respondent was able to arrive at that kind of reasoning, assuming that my evaluation of his position is accurate.

35. When the Respondent concedes that he ought to pay Kshs. 17 million as Tax, that implies that, by his own admission, the declarations of his income, were wholly inaccurate.  I so hold because a person who was earning almost nothing, as the Respondent had been declaring in his Returns, cannot possibly have had any lawful obligation to pay Kshs. 17 million as Tax.

36. On a prima facie basis therefore, the Respondent had derived income which should have been declared by him, but he failed to do so.

37. And whereas the Respondent has conceded owing Kshs. 17 million in taxes, the court finds it difficult to accept the Respondent’s own assessment as being accurate.  I so find, not because the court has any basis upon which to make a finding on the actual Tax payable, but because the Respondent had originally declared that he earned almost no income, and he now admits that he owes Kshs. 17 million as Tax.  On a prima facie basis, I find the Respondent to be unreliable, on the issue pertaining to his taxable income.

38. But in the light of the provisions of section 79 of the Income Tax, should not the Kenya Revenue Authority be told that they are barred from carrying out a tax assessment in respect to income which the Respondent earned more than 7 years ago?

39. In the ordinary course, a tax assessment ought not to be carried out by the Kenya Revenue Authority in respect to income which was earned more than 7 years prior to the time when the assessment was being conducted.

40. However, by dint of the provisions of Section 79 (1) (a) of the Income Tax Act, the Kenya Revenue Authority is permitted to conduct an assessment of tax even after the lapse of 7 years, provided that the person for who tax was being assessed, willfully neglected to provide an accurate self-assessment, or where the said person was deemed to have been fraudulent.

41. In my understanding, the Applicant’s assertion was that the Respondent was either willfully negligent in declaring that he earned almost nothing, when he knew or ought to have known that he was earning a considerable amount of money.

42. In the alternative, the Respondent could have been deliberately intent on fraudulently retaining tax which he ought to have paid to the Kenya Revenue Authority.  In so holding, I am not stating that the Respondent was guilty of fraud.  I am very cautious about being perceived as making any pronouncement which could be construed to imply that the Respondent was guilty of a criminal offence, yet he had not been charged, tried and convicted for any such criminal offence.

43. It is important to distinguish between criminal culpability and civil liability. 

44. A person is only said to be criminally culpable upon his being convicted for a criminal offence.  And in order for the court to find somebody criminally culpable, the evidence adduced must prove the guilt of that person beyond any reasonable doubt.

45. On the other hand, when a person is found, on a balance of probability, to be responsible for his acts or omissions, he is said to be liable.

46. In this case, the Respondent is not on trial for any criminal offence.

47. But he had responsibility thrust upon him by section 52 B of the Income Tax Act, which provides as follows; 

“1) Notwithstanding any other provision of this Act –

1. Every individual chargeable to tax under this Act shall for any year of income commencing with the year 1992, furnish to the Commissioner a return of income, including a self-assessment of his tax from all sources of income, not later than the last day of the sixth month following the end of his year of income; and
2. Every person other than an individual chargeable to tax under the Act, shall for any accounting period commencing on or after 1^st January, 1992, furnish to the Commission a return of income, including a self-assessment of his tax on such income, not later than the last day of the sixth month following the end of the year of income”.

48. The responsibility that was thrust upon the Respondent was to furnish to the Commissioner, a return of income, including a self-assessment of his tax from all sources of income.

49. When he furnished his returns of income and his self-assessment of tax, it does appear that the Respondent willfully withheld facts from the Kenya Revenue Authority.  In the circumstances, it would matter not whether he had a fraudulent intent or otherwise.

50. In the case of PILI MANAGEMENT CONSULTANTS LIMITED Vs COMMISSIONER OF INCOME TAX & KENYA REVENUE AUTHORITY, CIVIL APPEAL NO. 154 of 2007, the Court of Appeal noted as follows;

“Pili, as we have seen, made a nil return of income for the year 2004.  It alleged it was not trading for that year and that therefore, could not have earned any income upon which tax could have been levied.  But we now know, and the Commissioner came to know in May 2006 that around 8^th December 2004 Pili had a large amount of money in its accounts with the Bank.  It may well be that Pili did not trade in the year 2004 and the money in its bank account did not come from trading.  It may be that the money did not accrue in and was not derived from Kenya.  But the money was in a bank account in Kenya and it was in the account of Pili.  Prima facie, it was Pili’s money.  Instead of declaring a nil return, why would Pili not declare the presence of that money and then explain to the Commissioner why tax was not payable on that money?”

51. Similar questions could be asked in respect to JIMMY MUTUKU KIAMBA, the Respondent.

52. Once again, I emphasize the fact that the failure to pay tax on income which was taxable does not necessarily connote criminal culpability.  I have deemed it necessary to make that emphasis because Msagha J. did, in ETHICS AND ANTI-CORRUPTION COMMISSION Vs. JIMMY MUTUKU KIAMBA, Misc. CIVIL APPLICATION No. 804 of 2014, dismiss the Application for the extension of the Order to preserve the Respondent’s properties beyond the period of 6 months.

53. In the first instance, the Commission had obtained the preservation orders ex-parte.

54. Section 56 (1) of the Anti-Corruption and Economic Crimes Act empowers the High Court to make orders;

“prohibiting the transfer or disposal of or other dealing with property, on evidence that the property was acquired as a result of corrupt conduct”.

55. When the court makes the order ex-parte, that order remains effective for 6 months.

56. However, the person against whom the order is made, is entitled to apply that it be discharged or varied.  If the court is satisfied, on a balance of probabilities, that the property which was the subject of the ex-parte order was not acquired as a result of corrupt conduct, the court would discharge or vary the order.

57. In the light of the provisions of Section 56 of the Anti-Corruption and Economic Crimes Act, Msagha J. made the following findings;

“On moving the court ex-parte at the first instance, the applicant was required by law, to provide evidence that the property cited was acquired as a result of corrupt conduct.  Corrupt conduct must fall within the parameters of Section 56 (7) cited hereinabove.  Short of that, such an order may not be given.

The same standard shall be deemed to apply when an extension order given is sought after the initial period of six months expires and therefore the applicant is supposed to persuade the court that the threshold to justify the extension has been met”.

58. In that case, the court was told that the Applicant was still undertaking further investigations.  The applicant had not identified the source of the money which the respondent had in his bank accounts nor the source of the real property registered in his name.  In the light of that fact, the learned Judge said;

“I appreciate that investigations are an ongoing process, but that should never be used to block a deserving party from accessing his property just because the investigations have not revealed the source.  At most, the applicant can only say the source is suspect.  However, suspicion alone, however strong, is not evidence”.

59. I am in full agreement with my learned brother, in so far as the decision pertains to the Anti-Corruption and Economic Crimes Act.

60. However, in relation to the Income Tax Act, the Kenya Revenue Authority is not under any obligation to demonstrate that the money or other property was acquired corruptly or unlawfully.

61. It may even be possible that all the money and other properties were lawfully acquired.  However, that does not exonerate the Respondent from the responsibility of furnishing to the Commissioner, a return of his income, including a self-assessment of his tax from all sources of income.

62. Instead of discharging his responsibility, the Respondent furnished returns of his income which failed to disclose a self-assessment of his tax from all his sources of income.

63. Therefore, I hold the view that even though the Respondent says that he has enough assets which can be used to pay his taxes, his conduct casts serious doubt about his willingness to pay tax.  It is therefore only fair that the Respondent be prohibited from transferring, withdrawing disposing of or in any other way dealing with the money in his 10 Bank Accounts until the Kenya Revenue Authority concludes the assessment of the tax payable, and recovers the same.

64. Accordingly, I order that the funds held in the following Bank Accounts be preserved;

65. In order to be fair to both parties, I direct that the process of assessment be finalized within the next 30 days.

66. The court will mention the case shortly after the lapse of 30 days to ascertain the status.  This has been deemed prudent as the order for preservation cannot be of a permanent nature.  Therefore, as soon as the court is satisfied that the parties have had sufficient time and opportunity to carry out the Tax Assessment of the Respondent, it would be necessary to then discharge the orders.

67. For the avoidance of any doubt, the conduct of the Respondent will be one of the key factors to be taken into account when the court will be mentioning the case.  If there will be any obstruction to the process, that may result in a longer duration of the orders of preservation.  Conversely, if the Respondent offers his co-operation, but the Applicant appears to want to delay the process, the court may well cut short the orders for preservation.

DATED, SIGNED and DELIVERED at NAIROBI this 1^st  day of October 2015.

FRED A. OCHIENG

JUDGE

Ruling read in open court in the presence of

No appearance for the Applicant

Kabahati for Nyachoti for the Respondent

Collins Odhiambo – Court clerk.]