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M-Oriental Bank Limited V Commissioner of Domestic Taxes

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M-Oriental Bank Limited V Commissioner of Domestic Taxes REPUBLIC OF KENYA IN THE TAX APPEALS TRIBUNAL APPEAL NO.8 OF 2017 M-ORIENTAL BANK L1MITED APPELLANT VS THE COMMISSIONER OF DOMESTIC TAXES. RESPONDENT JUDGEMENT BACKGROUND: 1. The Appellant M-Qriental Bank Limited Oriental 'it-- Commercial Bank Ltd), is a li~ited [ability company incorporated in Kenya under Companie ct, Ca / ~ws of Kenya, licensed under The Banking Act Lawssof Kenya and registered by The Kenya ? Revenue Authority as a tax payer, PIN number P0006056 74D. 2. :rlje Resl?~ndent is the PrinciJl g'ent of the Government of Kenya in ''1 ~~ ,I'" Charge of'collection of revenue and ensuring compliance with the Tax Laws and is established by Section 3 of the Kenya Revenue Authority ~ >Nlf/ Act, Cap 469. ' , CAUSE OF ACTION: 3. The Respondent carried out an audit of the Appellant's records for the period 2014 to 2016 and issued an assessment for Capital Gains Tax (CGT) on 26th September 2016. The Appellant objected through a Notice of Objection dated 10th October 2016 and received by the Respondent on the following day. After an exchange of Judgement Appeal No.8 of 2017 eM-Oriental Bank Limited) Page 1 correspondence and further discussions, the Respondent issued an Objection Decision by way of a Confirmed Assessment dated 6th December 2016. 4. The Appellant being dissatisfied with the Objection Decision filed a Notice of Appeal dated 5th January 2017 with this Tribunal and served the same upon the Respondent on the same day. The Objection Decision was for CGT amounting together with penalties and interest am ,unted to Kshs.26,000,364.20. 5. The Appellant argues that the( Respontlenf without any legal basis or just~tion issue assessment, since this was a fresh issue and allotment of shares at a premium and could n 6. The Appellant prays ,? A APPELLANT'S~AS 7. Th~APpellant argues that on 9th October 2014, the Appellant entered into a' s'e subscription agre'*- rt- with M-Holding Limited (MHL) to acquire 510~Of the post inves ment issued share capital by way of subscription of the Initial Subscription Shares of 34% and purchases of certain issued the company from existing shareholders at 17%. , 8. The Appellant argues that the purchase agreement defines Initial Subscription Shares as 42,281,893 shares and the process of subscribing for these shares was provided for in the Subscription Agreement at Parts 3 and 4 thereof. The Appellant further argued that it advertised Judgement Appeal No.8 of 2017 eM-Oriental Bank Limited) Page 2 their plan to issue new shares from its authorized share capital to expand equity. 9. The Appellant submitted that of the 42,281,893 ordinary shares it issued 20,358,000 ordinary shares on 25th November 2015 and 21,923,893 ordinary shares on 2nd June 2016 to MHL Ltd which were not sold or transferred to MHL Ltd, but were issued at a premium, through allotment from the Appellant's therefore there was no gain realized ..• 10. The Appellant submitted that it to obtain the necessary approvals from Central Bank of Kenya ("CBK") and Competition Authority of Kenya ("CAK") in compliance with tn BK Act Section 13.4 and Section 3f Amalgamation, Transfe e rS;iand Liabilities for the whole process ~ comprising of two ph~ses which approval was granted on 18th February 2015 and reiterated by CBK n 6th January 2017. The % app Loval by CAK was granted on lI" December 2014 and copies of .t "'e7 reGluiHe correspondence i :tained in the Appellant's Statement 11. The Appellant argues that in the two phase process MHL Ltd would acquire 51% control of the Appellant through a two-step process which would involve: i. The Appellant issuing 42,281,893 ordinary shares to MHL (34%) and ii. MHL acquiring further shares from existing shareholders through an open offer to take their holding from 34% to 51% in the Appellant. Judgement Appeal No.8 of 2017 (M-Oriental Bank Limited) Page 3 12. According to the Appellant, they have so far only completed the first phase of the two steps which is to issue ordinary shares to MHL and no shares have been acquired by MHL from the existing shareholders as was intended. The Appellant argues that the Respondent has noted the two phase process and has further acknowledged validity of the process by accepting the resolutions authorizi e-; the Appellant to issue and allot the shares to MHL at the Appell" 13. On the basis of the above facts the Pf. ~ provisions of the law in support of its App i) Section 3(2)(f) of the Income Tax Act charge a tax on 6~ainsaccruing in the circumstances prescribed in. and compounded in accordance with the Eighth Schedule" and Paragraph 2 he Eigtit Schedule to the ITA which provides that "subiect to this Schedule. incam inrespect of which tax is ~ chargeable under section 3(2)(1) i 'he whole of a gain which st W rues to a comp n. or an individual on or after 1 snu ry.2015 on the trans er of property situated in Kenya. whe her, or not the p~ perty was acquired before ,st January 2015" known as CGT at a rate of 50/0. ~'1' ii) The definition of transfer is provided for at Paragraph 6 of the Eighth Schedule of the ITA and in particular Paragraph 6(1) of the Schedule which provides that; a 66 'transfer' occurs where: a) A property is sold, exchanged. conveyed or otherwise disposed of in any manner including gifting, whether or not for consideration. Judgement Appeal No.8 of 2017 (M-Oriental Bank Limited) Page 4 b) On the occasion of the loss, destruction or extinction whether or not a sum by way of compensation received including under a policy of insurance, unless the sum received is utilized to reinstate the property essentially in the same form and in the same place within 1year or such longer period as the Commissionet:-mayapprove. c) The abandonment, surrender, c. IIat/on or forfeiture of, or or debentures on the III. Paragraph 6(2) of the Eighth Schedule deals w which are not sfers for the purposes GT and the Appellant submit' r-- raph 6(2)(b) clearly states that there is no transfer "inl:the case ~ the issiJanceby a company of its own shares~ or debentures". 14. TheA{pellant therefore argues that since there was no transfer of ~ ~ares but-a mere issuance of - S, CGT was not chargeable and that an issuance ef shares by a company does not amount to transfer of shares as per Paragraph ~6(2) of the Eighth Schedule to the ITA and therefore not chargeaBle to CGT. 15. The Appellant urged the Tribunal to appreciate the difference between issuance of shares and a transfer of shares; i) The Appellant submitted that the issuance of shares by a company refers to the process of offering for subscription of new shares of a company and the subsequent taking up of subscription of the offered shares through allotment of issue Judgement Appeal No.8 of 2017 eM-Oriental Bank Limited) Page 5 by the existing or new members. However, a company must have sufficient authorized capital which is unissued before it issues new shares for subscription. ii) The Appellant argued that the shares which are signed by the signatories to the Memorandum of Association are deemed to have been issued when the com y is incorporated and other shares are issued when allotted such shares and th into the Register of Me 16. In respect to the process of issuanc a company, the .4", Appellant summarized this in the context of how it ~.S'. new shares as follows; i) The Appellant h red Million (10 ,000,000) shares and in June 2012 same to One Hundred shares by the creation The ilin increased these shares to One lion (175,000,000) shares by creation n (50 000,000) shares with a share value of Kenya shs.20) per share. ii) The Appellaf submitted that by 31st August 2015, it had issued a total of 82,275,660 shares of Kshs.20 and filed their Annual Returns thereto. This left a balance of 92,724,340 shares that had been created but had not been issued from its authorized share capital of 175,000,000 ordinary shares. The Respondent has not disputed the process that the Appellant followed in Judgement Appeal No.8 of 2017 eM-Oriental Bank Limited) Page 6 i) The allotment must be sanctione y a Director's Resolution " which the Appellant complied witH and this process has not been disputed by the Respondent. ii) Upon the said allotment, the Appellant filed the Return of Allotment in strict compliance with the Repealed Companies Act, Cap 486. iii) The Appellant then filed an interim annual return reflecting the additional shares allotted and issued by it as at 31st August 2015 and the Appellant had issued a total of 82,275,660 ordinary ~ , ~ shares of Kshs. 20. rRe -Appellant then issued 20,358,000 "'2 ordinary shares on 25th Novemberr. 2015 which reflected the new shareholder MHL as the holder of those shares. Further • allotment of 21,923,893 ordinary shares on 2nd June 2016 was undertaken by the Appellant to MHL bringing the total issue of new shares to MHL to 42,281,893. iv) The Appellant in compliance with the law then notified CBK on the allotment of the shares and the subsequent issue. This allotment was for the first issue of 20,358,000 ordinary shares and the subsequent issue of 21,923,893 ordinary shares.
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