In 2020, siblings sold a parcel of land to an unrelated developer. When computing the CGT payable on the sale of the parcels by the Appellant, the transfer value declared was the sale price as received from the developer, Risun Development Company, of Kshs.305,584,000/=. The Adjusted Cost used was as determined by the valuer of Kshs.389,619,600 on transfer.

The suit property was acquired through a transfer on 30/9/2015 upon conrmation of a grant of probate wherein the Appellants were the beneciaries.

In 2020 after the disposal to a third party the siblings filed and declared a loss on the disposal for CGT purpose. The Commissioner of Domestic Taxes reviewed the transaction documents and amended the siblings’ self-assessment to reflect an acquisition cost of zero on the basis that they did not incur the acquisition cost.

This resulting with a gain on the disposal of the parcels which the Commissioner demanded taxes on

THE APPELLANT'S CASE

The siblings argued that a gain crystalized during the transfer of the properties on execution and grant of probate and that this gain was exempted from CGT under Paragraph 36(f) of the First Schedule to the Income Tax Act. The Appellant further argued that the transfer of the properties to the developer was a separate transaction from the inheritance transactions.

The siblings argued that the Eighth Schedule to the Income Tax Act provided for a general method of determination of the cost of acquisition of property for CGT purposes and had an exception for instances where the acquisition was not at arm’s length.

Specifically, Paragraph 9 of the Eighth Schedule provided (in mandatory terms) that the cost of acquisition in related party transactions is not the actual cost but the fair market value at the time of transfer. The siblings had an independent valuer’s report for the year 2015 detailing the value of the property at the time of inheritance.

Given that the cost of acquisition (market value) exceeded the transfer value (selling price), the siblings made a loss for CGT purposes thus there was no chargeable gain.

The siblings also argued that the Commissioner erred by inferring that the value of the property at the time of inheritance was zero and by assessing taxes on only one of the siblings instead of apportioning the same amongst the siblings


THE COMMISSIONER'S CASE

The Commissioner largely agreed with the sequence of events as stated by the Appellants but differed on the interpretation of law. Specifically, the Commissioner argued that CGT computations were filed by the Appellants and that the Commissioner was not bound by the information provided by the Appellants. Further the Commissioner argued that it was empowered to assess additional taxes based on any other available information.

The Commissioner argued that the Appellants deducted an acquisition cost that they neither realized nor spent on.

TRIBUNAL'S DETERMINATION

The Tribunal noted that Paragraph 8 and 10 of the Eighth Schedule to the Income Tax Act were the provisions of law that were relevant in the determination of the contested adjusted costs. It further noted that Paragraph 9 to the Eighth Schedule made an exception to the determination of the adjusted cost in instances where such an acquisition was not carried out at arm’s length.
Particularly, Paragraph 9 provided for the use of the fair market value at the time of acquisition as the cost of acquisition in this circumstance.

The Tribunal held that Paragraphs 8 and 10 of the Eighth Schedule could not be applied in isolation of Paragraph 9 when the latter applied.

In view of the above, the Tribunal found that the Commissioner erred by claiming that the properties had no acquisition cost as Paragraph 9 effectively provided for the determination of the cost basis upon the disposal of inherited property.

The Tribunal further found that the transfer upon inheritance fell within the ambit of Paragraph 9 and that the independent valuer’s report was a sound basis for the determination of the fair market value of the properties.

Accordingly, the Tribunal allowed the appeal by finding that the Appellants had correctly used the fair market value at the time of acquisition as the cost of acquisition and that the Commissioner erred by adjusting the cost of acquisition to zero.