Business Partners should pay income tax on their share of profits

Case Study: Oluoch v Commissioner of Legal Services and Board Coordination

Business Partners should pay income tax on their share of profits –

On 21st September 2021, KRA wrote to Oluoch’s bankers, Kenya Commercial Bank, requiring it to immediately pay a sum of KShs. 1,687.467.00.

Due to the inability to access funds in her bank account at Kenya Commercial Bank on account of the agency notice, on 1st October 2021, Oluoch visited the Kericho KRA tax office, where she was furnished with 3 tax assessments all dated 31st August 2018.

By a letter dated 4th October, 2021 and lodged by email on 5th October, 2021, Oluoch objected to the assessments and the agency notice and requested KRA’s officer responsible for the Debt Enforcement Section to withdraw the agency notices.

Owing to the failure by KRA to withdraw the agency notice dated 21st September 2021, Oluoch instituted Misc. Tax Application 97 of 2021; Linda Odhiambo Oluoch vs. Commissioner of Domestic Taxes. The agency notice was vacated by consent on 22nd October 2021.

On 22nd December 2021, KRA issued its objection decision wherein Oluoch’s objection was dismissed and taxes demanded in the sum of Kshs. 1,375,821.94.

Being dissatisfied with the objection decision of KRA, Oluoch lodged a Notice of Appeal

The appeal was premised on the following grounds:

• That KRA erred in fact and in law by issuing the objection decision dated 22nd December, 2021, out of time contrary to Section 51(11) of the Tax Procedures Act, 2015.
• That KRA erred in fact and in law by failing to appreciate and consider that it was unlawful and unreasonable to raise, on the same day, multiple additional assessments over the same tax period.
• That KRA erred in fact and law by issuing the objection decision that purported to alter the assessment period from the year 2016 only to 2016, 2017, 2018.
• That KRA erred in fact and in law by failing to appreciate and consider that the 3 additional assessments all dated 31st October 2018 failed to comply with the mandatory requirements provided in Section 31(8) of the Tax Procedures Act, 2015.
• That KRA erred in fact and in law by failing to appreciate and consider that the 3 additional assessments all dated 31st October 2018 were defective and fell short of the requirements of a proper notice in so far as they failed to disclose the nature and implication and consequences of non-compliance.
•  That KRA erred in fact and in law by failing to appreciate and consider that during the tax period under review, at no time was Oluoch involved in the management of the partnership known as Motorcar Enterprises, including as a signatory to any transaction or even bank accounts and that she never derived any financial benefit, including income, from the aforesaid partnership.
• That in the alternative, and without prejudice to the foregoing, KRA erred in fact and in law by holding that Oluoch was liable for 50% of the partnership’s alleged tax liability while failing to appreciate that Oluoch’s stake in the partnership was 30% hence, pursuant to Section 12(1) of the Partnerships Act, 2012, and Clause 6 of the Partnership Deed dated 1st July 2016, any alleged liability in taxes by Oluoch could only be levied at the rate of 30% of the outstanding taxes, if any.

KRA responded that:

• Oluoch, in her annual income tax returns, failed to declare her share of income derived from the operation of Motorcar Enterprises. That data from Customs and Border Control Department clearly indicates customs entries made by Motorcar Enterprises for importation of second-hand cars between 27th September, 2016, and 1st September, 2018. That Oluoch made no declaration of her share of income from the sale of the imported cars in her annual income tax returns.
• KRA was guided by the information provided by Oluoch in arriving at the assessment. That Section 24(2) of the Tax Procedures Act provides that, “The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer’s tax liability using any information available to the Commissioner”
• Oluoch filed a late objection on 4th October 2021, stating majorly that she did not derive any income from the partnership. That Oluoch did not provide any evidence of dissolution of the partnership in any of the forms provided under Section 35 of the Partnership Act.
• Section 7(1) of the Partnership Act, 2012 provides that: “Each partner in a partnership shall have responsibility for the business of the partnership.”
• KRA magnanimously gave time to Oluoch to avail the requisite documents but to no avail and in adherence to the law issued an additional income tax assessment on 22nd December 2021 amounting to Kshs 1,375,821.54 for the years 2016, 2017, and 2018.
•  That if indeed Oluoch did not receive income from the partnership business with her estranged husband, she should not have resisted in providing copies of accounts covering the period under review, supporting ledgers and documents to either show resignation or dissolution of the said partnership.

In its ruling on 02/06/2023, TAT observed that:

• The email correspondences between the parties and the last having been made on 2nd November, 2021, KRA’s objection decision issued on 22nd December, 2021 was well within the 60-day timeline as provided under Section 51(11) of the TPA.
• The Partnership Deed was attached to Oluoch’s pleadings and, therefore, the averment by Oluoch that she was only entitled to 30% of the partnership’s earnings was substantiated by the Deed. Further, an email dated 23rd May, 2019 from Oluoch to KRA’s officer shows that Oluoch had in this email attached the Partnership Agreement referred to in the parties’ pleadings, explained her stake of 30% in the partnership and informed KRA that she was in the process of winding up as she had already served her resignation from the partnership to the other partner.
• Contrary to the averments by KRA that Oluoch had not adduced sufficient evidence to back its pleadings, Oluoch attached the Partnership Deed, the Certificate of Registration of the partnership, the Notice of Cessation of business dated 16th September 2019 and a Certificate of Cessation of Business by the Registrar of Companies dated 5th December 2019 all of which support Oluoch’s averments as to her status as far as the partnership in question is concerned.
• Oluoch discharged the burden of proof placed upon her in demonstrating that KRA erred in its assessment of income tax. KRA did not appropriately consider Oluoch’s specific shareholding in the partnership and, by extension, her tax liability in respect of the revenue generated by the partnership.

The appeal was therefore allowed. KRA was ordered to recompute Oluoch’s tax liability based on her 30% stake in the partnership as per the Motorcar Enterprises Partnership Deed.

Business Partners should pay income tax on their share of profits

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