KRA v Chase Bank Kenya Ltd

On 7th April 2016, the Central Bank of Kenya in exercise of its mandate appointed Kenya Deposit Insurance Fund ("KDIC") as a receiver of the Chase Bank in the interest of its depositors, creditors and members because it was experiencing liquidity difficulties and it was unable to meet its financial obligations. KDIC appointed a consulting firm to conduct an investigation over its management transactions and annual financial statements as at 31st December 2015 and specifically to investigate (a) The balance sheets; (b) Advances to the former director and significant shareholder; (c) Advances to the third parties owned by the bank's former director; and (d) Withdrawals and payments made on behalf of its former director for the period January 2016 to December 2017.

The investigation revealed massive theft, fraud and misappropriation of the Chase Bank funds by its former Director/Chairman and companies affiliated to him. The Office of the Deputy Public Prosecutor following its enquiries into the alleged misappropriation of the funds by the taxpayer forwarded to KRA the report to determine whether any tax related offences had been committed. KRA investigated the affairs of?Chase Bank ?based on the said findings and at the end of its investigations for the period January 2014 to December 2017 raised a tax demand note for Kshs 1,181,431,680 dated 9th April 2018 classified under the following tax heads: - (a) Principal amount Kshs. 863,835,005; Penalty Kshs. 201,030,820; Interest Kshs. 106,101,225; total Kshs. 1,170,967,050. Withholding tax was tabulated as follows; (a) principal amount Kshs. 7,267,164; penalty Kshs. 1,453,421; Interest Kshs. 744,105; total Kshs. 10,464,690.

Aggrieved by the above assessment, Chase Bank appealed to the TAT on the following grounds:

a. That KRA??erred in law and misdirected itself in finding that the PAYE was payable by chase Bank for the irregular and unauthorized payments towards purchase of property by the banks former Chairman;

b. KRA erred in law and misdirected itself in finding that the payments towards the purchase of the property by the bank;s former Chairman without the approval of the board of directors constituted gains and profits chargeable under sections 2 and 3 of the Income Tax Act;

c. KRA erred in law and misdirected itself in finding that the irregular and unauthorized expenses and /or withdrawal by the 2nd appellant's former Chairman constituted gains chargeable under sections 2 and 3 of the ITA;

d. KRA erred in law and misdirected itself in finding that PAYE was payable on bonus taken by the 2nd appellant's former Chairman whilst the bonus was not authorized or sanctioned by the 2nd appellant's Board of Directors;

e. That KRA erred in law and misdirected itself in finding that withholding tax was payable on the consultancy fees drawn by the bank's former Chairman as there was no consultancy agreement between the?bank and the former Chairman when the consultancy fees were drawn;

f. KRA erred in law and misdirected itself in confirming the tax assessment in the sum of Kshs. 1,181,431,680/=;

g. KRA misdirected itself by failing to appreciate that there are pending recovery proceedings filed by the Receiver Manager against the banks's former Chairman being HCC NO. 159 Of 2017: Chase Bank Limited (In receivership) v Zafrulla Khan and 19 others seeking to recover the sums misappropriated;

h .KRA ?misdirected itself in failing to consider and take into account the fact that there are pending criminal proceedings initiated by the Banking Fraud Investigation Unit against the bank former Chairman for defrauding and conspiracy to defraud the bank.

In its judgement TAT ruled that:

(i) the payment of the bonus amounting to Kshs 1,053,475,989 be subjected to PAYE;

?(ii) the payments for the two properties, Grand Opera 419,235,338 and Armani property 253,096,554 should not be subjected to tax;

(iii) that expenses and withdrawals amounting to Kshs 1,153,642,138 should not be subjected to tax;

Both Parties appealed to High Court on the lost grounds

The High Court observed that:

1) Income received is subject to tax notwithstanding the fact that it is tainted with illegality or is received from illegal activities.

2) Under the ITA, particularly to section 37 of the Act, it is the responsibility of the employer to deduct and remit taxes from the salaries, emoluments and allowances of its employees.

As such the High Court upheld TAT decision that:

(i) the payment of the bonus amounting to Kshs 1,053,475,989 be subjected to PAYE;

?(ii) the payments for the two properties, Grand Opera 419,235,338 and Armani property 253,096,554 should not be subjected to tax;

(iii) that expenses and withdrawals amounting to Kshs 1,153,642,138 should not be subjected to tax;

The Decision was delivered on 03/09/2021