By Wahome Thuku
Charterhouse Bank is one of the many Kenyan banks that have collapsed and is now under statutory management of the Central Bank of Kenya (CBK).
On February 24, 2004 the Kenya Revenue Authority (KRA) carried out a tax assessment on the bank and established that it was in arrears to the tune of more than Sh59.6 million.
These were in form of corporation tax, withholding tax for 1999 to 2003 and PAYE, all amounting to Sh59,653,896.
On March 1, 2004, Kenya Revenue Authority (KRA) issued an agency notice appointing CBK to collect the taxes on their behalf within a year. Indeed, KRA was targeting payments using Charterhouse Bank’s funds held in the CBK.
On March 5, 2004, CBK wrote to Charterhouse Bank seeking to know the position of the matter.
The CBK informed the bank that they intended to implement the notice without any delay.
On April 21, 2004, Charterhouse Bank filed a suit against the Commissioner of Income Tax at the High Court in Nairobi seeking orders to have the notice quashed.
They also applied for orders to have KRA prohibited from issuing any other notice based on the assessment unless it first complied with the provisions of the Income Tax Act.
Charterhouse Bank claimed they received the notice on February 27 at 3pm and had not had an opportunity to respond to the said assessment.
They told the court that they lodged an objection against the assessment by a letter dated March 8, 2004 but KRA had declined to withdraw the notice.
Further, the bank argued that the funds held at the CBK, which were the subject of the agency notice, were deposited in accordance with statutory requirements and hence were not available to satisfy the notice as KRA wanted.
natural justice
The bank claimed the agency notice had been issued in disregard to the rules of natural justice, was arbitrary and had no foundation. They claimed the notice was only intended to embarrass them and asked that the orders sought be granted.
In an affidavit sworn by one Justus Musau Kiuvu on July 12, 2004, KRA denied the allegations made by the bank.
Musau confirmed that KRA had conducted an audit on the bank’s tax affairs during which time he had met Charterhouse Bank officials on several occasions to discuss the matters.
Musau said the bank officials failed to respond to a number of questions prompting the commissioner of income tax to issue the agency notice to CBK under the provisions of Section 96 of the Income Tax Act.
He agreed that the bank had lodged an objection but said the same was not accompanied by supporting documents as required by the rules.
The case was adjourned several times and on June 6, 2006 it was stood over generally, meaning no date was set for further hearing. The bank did not take further action and early this year, the High Court issued a notice to dismiss the matter for want of prosecution.
On receiving the notice, the bank filed an objection in court on February 24. The objection was heard by High Court Judge David Majanja.
He allowed the bank a chance to argue the case. He fixed the case for hearing on April 18, and directed the parties to file written submissions.
The KRA filed their submissions on April 1, through lawyer B. Mwamuye.
When the matter went for hearing on that day, Charterhouse Bank’s lawyer Ms S Simiyu applied for an adjournment so that she could prosecute a separate application to have her law firm stop acting for the bank.
Justice Majanja rejected that application for adjournment and ordered that the eight-year old case be heard right away.
Ms Simiyu then told the court she did not have instructions from the bank and did not make any submissions. The KRA lawyer relied on their filed submissions.
In his judgment on April 30, Majanja single out the one question in dispute, being whether KRA was entitled to issue the agency notice.
He said KRA was entitled to issue the notice under section 96 of the Income Tax Act.
“I am satisfied the circumstances of this case there was tax due from the bank and the respondent was entitled to exercise its power to collect tax,” he ruled.
no bad faith
Majanja said he could not conclude that the notice had been issued in bad faith or arbitrarily or that it had no foundation.
The bank had argued that CBK could not under the law be an agent for KRA and therefore the agency notice was above the authority of the taxman.
“This argument lacks merit for several reasons,” the judge held. “First there is nothing in the Income Tax Act which exempts CBK from the provisions of section 96 of the Act. Secondly there is nothing in the CBK Act or the Banking Act that grants immunity to CBK from the provisions of section 96 of the Income Tax Act,” he noted.
Majanja said if CBK was aggrieved, it would have raised an objection to the agency notice.
“To date no objection or intervention had been lodged by CBK,” the judge observed.
Majanja considered another decision in an earlier case of Pili Management Consultants Ltd vs Commissioner of Income Tax (2007) challenging a similar agency notice.
In that case the Court of Appeal had stated thus: “Either tax was or was not payable on the money in the bank and whether the commissioner’s assessment or assessments are correct will, we hope, be determined in the objection proceedings lodged by Pili.
On the question of whether the agency notice was validly issued, we are satisfied that in the particular circumstances of this case the notice was validly issued...”
Basing his conclusion on that case, Majanja said, “I am also satisfied that the agency notice validly issued.”
The judge said as such, the order to quash the notice could not be issued. The Commissioner of Income Tax had not acted unreasonably or in excess of their legal authority in demanding the outstanding taxes hence the prohibition order too, could not be issued.
With that, the judge dismissed the case filed by Charterhouse Bank on April 21, 2004 and ordered the bank to pay costs of the suit.
That meant Charterhouse Bank’s bill with KRA increased and the CBK is free to pay the dues using the bank’s deposits.
The writer is a court reporter with the Standard Group
Email: wthuku@standardmedia.co.ke
