The taxpayer claimed investment deduction for the building and machinery at the rate of 150% of the cost incurred in the financial year 2018/2019 in accordance with Paragraph 24(1)(f) as read with Paragraph 24(2)(c) of the Second Schedule (now repealed) to the Income Tax Act, Cap 470.

KRA disallowed the investment deduction claim of KShs.423,033,494 and demanded for payment of corporation tax amounting to KShs.29,317,209, indicating that the claim could not be made under the period 2018/2019 but in 2019/2020 on the basis that manufacturing commenced in 2019/2020.

KRA’s contention was that the production levels in June 2019 were very low and constituted test runs and not manufacturing.

KRA also indicated that payments made on behalf of foreign contractors in respect of rent, housekeeping and taxi services constituted consultant fees, which fell within the definition of management fees and were subject to withholding tax at non-resident rates, amounting to KShs.1,662,542.

KRA disallowed the investment deduction claim of KShs.423,033,494 and demanded for payment of corporation tax amounting to KShs.29,317,209, indicating that the claim could not be made under the period 2018/2019 but in 2019/2020 on the basis that manufacturing commenced in 2019/2020.

KRA’s contention was that the production levels in June 2019 were very low and constituted test runs and not manufacturing.

KRA also indicated that payments made on behalf of foreign contractors in respect of rent, housekeeping and taxi services constituted consultant fees, which fell within the definition of management fees and were subject to withholding tax at non-resident rates, amounting to KShs.1,662,542.

Taxpayers. Arguments

The arguments presented on behalf of the taxpayer were that: -

Tax statutes must be strictly construed. Paragraph 24(1)(f) did not provide that a building must be used for manufacture in the year of first use in order to qualify for an investment deduction. It simply provided that an investment deduction would be allowed in the year of income when it is first used. If the drafters of the provision had intended that the building must have been used for manufacture, they would have stated so.

In any event, the building was used in manufacture in the year of income 2018/2019. Manufacturing commenced in June 2019 when the first and second batches of the taxpayer’s product were manufactured.

The Tax Laws (Amendment) Act, 2020, came into force on 25 April 2020 and could not apply retrospectively to a claim. Section 23(3)(c) of the Interpretation and General Provisions Act (“IGPA”) prohibits the retrospective application of the law and provides that the repeal of a law shall not affect a right, privilege or obligation that was acquired or accrued under a written law so repealed. As such, the amendment could only apply if the year of first use of the building commenced on 1 July 2020.

The Court analyzed the parties’ respective positions and concurred with the taxpayer’s position on the issues raised. The Court found that: -

The rule when interpreting tax statutes is that they ought to be strictly construed. There is no room for intendment, reading in or implying meaning.

The Court considered the Tax Laws (Amendment) Act, 2020 in light of the provisions of the IGPA and found that the right acquired by the taxpayer under the repealed Second Schedule could not be affected by the repeal. The repeal came in after the construction of the building was complete and even if it were to be decided that the first use was in August 2019 and not June 2019, the existing framework at the time was still the Income Tax Act prior to the 2020 amendments.

Based on the definition of “manufacture” under the Second Schedule, there was actual manufacturing of the first and second batches in June 2019.

The payments made by the taxpayer on behalf of the non-resident contractor were made to local service providers and constituted the taxpayer’s expenditure, not income accrued by the contractor. They did not fall within Section 35(1) as read with Section 10 of the Income Tax Act. KRA was therefore in error in claiming withholding tax from the taxpayer.

Orders Issued by the Court

The Court found that the TAT judgment was not erroneous and it dismissed the Commissioner’s appeal.