Genesis and Background of the Case

This case arose from a contractual agreement dated 21st April 2009 between Fintel Ltd and China Jiangsu International Economic Technical Co-operation, for the construction of a rental building. A term of the contract provided that unpaid contract fees would accrue interest, which Fintel agreed to pay. During implementation, Fintel experienced cash flow difficulties and booked interest expenses as liabilities in its accounts, although no actual payment was made.

Following a tax audit, KRA demanded KES 4,787,257 in withholding tax on the accrued interest. Fintel objected, arguing that withholding tax only applies upon actual payment—not mere accounting recognition. The objection was rejected via a letter dated 29th July 2009, prompting Fintel to file judicial review proceedings, which the High Court granted through an order of certiorari. KRA appealed the decision.

Background of the Case – Key Points

1. Interest Accrual Dispute: Fintel accrued interest in its books due to late payments to the contractor but did not pay the interest.
2. Audit and Assessment: KRA audited Fintel and demanded withholding tax on the accrued interest under Section 35(1)(e) of the Income Tax Act.
3. Objection Rejected: Fintel’s objection was dismissed by KRA on 29th July 2009, triggering judicial review action.
4. High Court Outcome (2012): Justice Majanja quashed KRA’s tax demand, holding that withholding tax was only due upon actual payment.

Appellant’s Submissions (Kenya Revenue Authority)

1. Accrued Expenses are Taxable: KRA argued that once interest is accrued and booked as a liability, it is deemed “paid” per Section 2 of the Income Tax Act.
2. Definition of “Paid”: Emphasized that “paid” includes amounts “credited, dealt with or deemed to have been paid”—thus triggering withholding tax.
3. Section 35 Prevails: Withholding tax must be deducted “upon payment”, which KRA argued includes accruals where liabilities are acknowledged.
4. Accounting Principle: Fintel used the accrual method, meaning expenses are recognized when incurred, not when paid—hence tax liability crystallized.
5. Ultra Vires Argument Refuted: Claimed the Commissioner acted within powers under Section 120 of the Income Tax Act.
6. Alternative Remedy Available: Fintel had earlier issued a Notice of Appeal to the Local Committee, making judicial review improper.
7. Case Law Support: Relied on Cimbria (EA) Ltd v KRA [2017] eKLR and South African tax jurisprudence on accrual-based liabilities.

Respondent’s Submissions (Fintel Ltd)

1. No Actual Payment Made: Argued that interest was merely booked but never paid, so no withholding tax was due.
2. Literal Interpretation: Advocated for a strict reading of “upon payment”, meaning actual settlement in cash or cheque.
3. Not a Completed Transaction: Recognition in accounts is not equivalent to monetary discharge; hence tax was premature.
4. Violation of Article 47: The demand without clear justification breached rights to fair administrative action.
5. No Withholding Tax Without Payment: Claimed that tax is withheld from income actually paid, not just accrued.
6. Judge Was Correct: Supported the High Court’s finding that payment triggers tax, not mere accounting provisions.

Court of Appeal Decision – Key Points

1. “Paid” Includes Credited Amounts: The Court held that under Section 2, amounts “credited or deemed paid” fall within the scope of “paid” for tax purposes.
2. Withholding Tax Due Upon Accrual: Fintel’s booking of interest reduced its taxable income. As a benefit was gained, tax liability arose.
3. High Court Erred in Narrow Interpretation: The Court found the High Court misapplied statutory interpretation by insisting on actual cash payment.
4. Certiorari Improper: Held that KRA acted within its legal mandate and the decision was neither ultra vires nor procedurally unfair.
5. Judicial Review Misapplied: Reiterated that Fintel had an alternative remedy (Local Committee appeal) and judicial review was not the proper route.
6. Appeal Allowed:
   • High Court judgment dated 5th October 2012 was set aside.
   • Costs awarded to KRA at both High Court and Court of Appeal levels.