TILE AND CARPET CENTRE LIMITED VS KRA

- KRA carried out a tax compliance check on TCCL for the period January 2010 to November 2011. It discovered that in July 2010 and October 2010, TCCL ??deposited with their advocates KES 15,937,000/= and KES. 149,351,250/= towards the purchase of land. The purchase was being done on behalf of an associated company; Tile and Carpet Development Limited. The deal aborted and the money was credited back to TCCL account in two instalments; Kshs. 65,288,250/= and Kshs. 100,000,000/= in February and March 2011 respectively

-KRA contended that TCCL had sourced the funds from a credit facility and its total borrowings and overdraft for the years 2011 and 2012 was an aggregate sum of Kshs. 770,580,969/= with an accrued interest expense of KES 84,833,487.00.

- KRA therefore restricted and disallowed interest expense relating to the borrowing to the extent of the amount deposited with TCCL advocates and by a letter dated 13th November 2013, it raised the additional tax assessment to KES ?2,942,539/=.

-TCCL objected

- KRA considered the objection and requested additional evidence on whether TCCL had sufficient reserves to fund the alleged purchase. TCCL failed to furnish the evidence, KRA confirmed the additional assessment by the letter dated 2nd December 2013 thus precipitating the appeal to the Tribunal.

- ?After hearing the matter, the Tribunal held that TCCL did not provide crucial documents that would have assisted the Tribunal to ascertain the true purpose of the transfer of money to its advocates such as the agreement of sale and that the loan documents produced did not state the purpose of the loans and were not properly executed.

- TAT further held that the evidence presented by TCCL was also contradictory in that it stated that it relied on credit facilities to finance its operations while on the other hand it stated that it had sufficient cash to finance the acquisition of land for a sister company.

-TCCL appealed to the High Court

- TCCL submitted that the issue in contention is whether the funds deposited with their advocates were intended to purchase the property for the associated company and whether the funds were derived from the overdraft facility. TCCL contention is that the funds were not derived from the overdraft facility but from retained earnings.

-TCCL also submitted that the intended use of funds was not to purchase property for its sister company but for itself

- KRA submitted that TCCL ?was advancing funds to a sister company while it was maintaining huge credit facilities with banks and incurring large interest expense. It could not prove that it had sufficient retained earnings to finance additional investments and that the amounts deposited with the advocates was not available as working capital.

-KRA maintained that the borrowed funds were obtained for the purpose of purchasing of property for its sister company which did not materialize and the funds returned and that at all times the money was not available for working capital.

-In its ruling on 31/03/2020 the High Court concluded that ?TLCC did not discharge its burden to show that the tax decision was wrong. There was sufficient evidence to show that the purpose of the borrowing was not, “wholly and exclusively incurred” ?for the production of income. That money came from the overdraft account; it was deposited with its advocate for the benefit of another company hence it was not available for TCCL for its working capital during that period. KRA was therefore entitled to disallow the interest expense under section 16(1)(a) of the Income Tax Act.

TCCL lost the case again