ABN Amro Bank NV v Kenya Revenue Authority [2017] KECA 509 (KLR)
The bottom line
#Kenya's Court of Appeal cancelled a KRA demand of Kshs 117 million, ruling that unreasonable tax decisions can be challenged in court even when a tax appeal route exists.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.Whether the learned judge rightly determined that this was not a matter for judicial review, the appellant having an alternative statutory appeal process under section 84 of the Income Tax Act
- 2.Whether the respondent's decision was irrational and unreasonable so as to warrant the interference by the Court with that decision
Key legal issues
#Whether the existence of an alternative statutory appeal process under section 84 of the Income Tax Act barred judicial review
The High Court erred in holding that the appellant should have appealed under section 84 of the Income Tax Act. Where the reasonableness of a decision is challenged, the matter is eligible for judicial review notwithstanding the statutory appeal route.
The Court held that the dispute, being about the reasonableness of the respondent's decision, required the interpretation and application of the Income Tax Act in conjunction with other relevant provisions of the law, and therefore was not a straight forward tax assessment query to be left solely to the tax specialist authority upon appeal. The learned judge misdirected herself in directing the appellant to the statutory appeal process.
Whether the respondent's decision to apply section 5(2)(c)(i) of the Income Tax Act was irrational and unreasonable
The decision was irrational and unreasonable. Severance pay following redundancy is compensation based on sums already accrued during employment, computed under section 16A of the repealed Employment Act, and taxes on an unexpired period of a contract could not be computed where the employees had been declared redundant.
Section 16A of the repealed Employment Act provides severance pay at 15 days pay per completed year of service, based on sums accrued during employment. Section 5(2)(c)(iii) of the Income Tax Act refers to compensation paid in the period following termination of an unspecified term contract. Since severance pay accrual was based on years worked and the employees were made redundant, sums based on a retirement age that could not be attained did not exist, making the demand for taxes on such sums absurd.
Whether the employment contracts were specified term contracts by virtue of the retirement age clause
The contracts were not fixed term contracts. They incorporated a provision for termination by notice from either party, which negates a fixed term, and the retirement clause was in any event the wrong basis for computing taxes on redundancy and severance pay.
Following Lord Denning MR in British Broadcasting Corporation v Ioannou, a fixed term is an agreement which cannot be unfixed by notice and binds parties for the term stated. The employees' contracts were terminable by either party on notice. Much as the Court had doubts whether the retirement clause could be the basis of a fixed term contract, it found it to be the wrong basis for computing taxes on redundancy and severance pay.
The proper scope of judicial review following the promulgation of the Constitution
While judicial review traditionally concerned the decision-making process and not the merits, Article 47 of the Constitution and the Fair Administrative Action Act, 2015 have expanded the scope of judicial review to encompass, to some extent, issues of merit.
The Court noted the traditional position as stated in Biren Amritlal Shah v Republic, but observed that following the promulgation of the Constitution, Article 47 and the Fair Administrative Action Act of 2015 expanded the scope of judicial review to encompass issues of merit to some extent, citing Suchan Investment Limited. Nonetheless, guided by the preconditions prevailing at the time of the impugned decision, the Court applied the traditional principles.
Legal principles established
#- Unreasonableness (Wednesbury irrationality) of a public body's decision is a matter eligible for judicial review, and the existence of a statutory appeal process does not bar judicial review where the reasonableness of the decision is challenged.
- For the purposes of computing taxes on severance pay following redundancy, section 5(2)(c)(iii) of the Income Tax Act (unspecified term contract) is the appropriate provision to be applied, and not section 5(2)(c)(i) (specified term contract).
- A contract of employment containing a provision for termination by notice from either party cannot constitute a fixed term contract on the basis of a retirement age clause.
Court orders
#- 1.The order of the High Court of 8th July 2011 was set aside
- 2.An order of certiorari issued to quash the respondent's decision of 26th June 2002
- 3.An order of prohibition issued to prohibit further demand for the amount of Kshs 117,232,198/-
- 4.The appellant awarded the costs of both this appeal and the costs in the High Court against the respondent
The bench
#One judgment of the whole court — no separate or dissenting opinions.
- On appeal from
- High Court at Nairobi
- Misc Civil Application Number 1135 of 2002
- Jurisdiction invoked
- First appeal to the Court of Appeal against the High Court's dismissal of a judicial review application (statutory appellate jurisdiction under the Court of Appeal's ordinary appellate powers)
Quotable passages
#Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.
From the above, it can therefore be concluded that unreasonableness of a decision is a matter for judicial review, and we find that this being a matter questioning the reasonableness of the respondent’s decision, it was a matter eligible for judicial review, placing the application squarely within the ambits of the court for determination.
Based on the fact that the two provisions required to be applied to the period following termination of the contract, we find that, for the purposes of computing taxes on severance pay, section 5 (2) (c) (iii) was the appropriate provision to be applied, and not section 5 (2) (c) (i)
The employees’ contracts all incorporated a provision for termination of the contract of employment with a notice from either party which would mean that a contract for a fixed term was negated.
We set aside the order of the High Court of 8th July 2011, and substitute it with an order of certiorari to quash the decision of 26th June 2002, and issue an order of prohibition to prohibit further demand for the amount of Kshs 117,232,198/-. The appellant shall have the costs of both this appeal and the costs in the High Court against the respondent.
Issues in the judgment
#The judgment alternates between citing section 5 (1) (c) (i)/(iii) and section 5 (2) (c) (i)/(iii) of the Income Tax Act for what appears to be the same dispute, and at one point refers to 'the two provisions required to be applied to the period following termination of the contract' in a manner that could be read as internally inconsistent with its finding that section 5 (2) (c) (iii) applies to the period following termination while section 16A compensation relates to the time of termination.
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "ABN Amro Bank NV v Kenya Revenue Authority [2017] KECA 509 (KLR)", Case Analysis (2017). Civil Appeal No. 111 of 2013. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2017/509/eng@2017-06-09
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.