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Bank wins Sh11 million case against former MP

By - | May 6th 2013 at 12:00:00 GMT +0300


KENYA: Mr Erastus Mureithi is the immediate former Ol Karau MP. Before joining Parliament in 2007, he was the CEO of Cooperative Bank since May 13, 1989. Mureithi resigned as CEO in March 2001, but continued serving as consulting director until September that year.

On April 4, 2001, the bank received a letter from Kenya Revenue Authority (KRA) raising issues with payment of taxes on some benefits enjoyed by Mureithi. These included motor vehicle running allowance, insurance premiums, fees for his daughters, including their air travel allowances, as well as security guard services at his home. The letter was based on an audit report for the year 1998 to 2000.

Cooperative Bank then wrote to Mureithi on March 23, 2003 informing him that they had settled his tax liabilities amounting to Sh11.2 million and asked him to pay back the money within seven days.

Mureithi did not remit the money. On March 31, 2003, the bank sued him seeking to recover the money. The case went before Nairobi Judge J.B. Havelock.

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The bank argued that it was Mureithi’s responsibility to ensure compliance with his statutory obligations to the KRA. He was, therefore, personally liable for failure to remit the taxes. Cooperative Bank submitted that Mureithi had unjustly enriched himself  since the bank had settled the bill for him as it was entitled to recover the money.

Mureithi filed a defence denying any culpability on unpaid taxes. He said all his benefits had been taxed appropriately and he only received the net after the deductions. He denied owing the bank the Sh11.2 million saying the money was directly chargeable to Cooperative Bank as his employer by KRA. He argued that the suit was bad in law and had been wrongly instituted and asked that it be struck out with costs.

Legal requirements

Judge Havelock questioned why the bank never made tax deductions on benefits and allowances enjoyed by Mureithi and family yet it was aware of the legal requirements.

The bank argued that as the MD, Mureithi was aware of the requirement to make deductions on his salary, benefits and allowances.

“He acted in reckless disregard of his responsibility as the MD and the CEO,” the bank submitted.

But Judge Havelock still questioned; “To the mind of the court, there has to be a plausible reason as to why the plaintiff (Cooperative Bank) ignored its statutory obligation to make deductions on tax on all salaries, benefits and allowances enjoyed by its employees.”

The bank’s former Head of Finance Lawrence Karissa said the bank would foot all medical expenses for Mureithi’s wife and four children aged below 18. It would pay education expenses for the four children up to and including undergraduate level.

Karissa said Mureithi was entitled to Sh8,000 a month as entertainment allowance to be revised from time to time.

Mureithi’s insurance premiums with Keyman Insurance was Sh10 million. The tax payable on the education fees for his children from 1998 to 2000 was computed by KRA as Sh4.6 million. The bank had paid airfare for Mureithi’s family trips to the UK and US in 1998 and 1999 attracting a tax of Sh474,241. The bank had used a tax refund from KRA to settle the Sh11.1 million.

The bank constructed a house for him on his own plot, which was later transferred to a company called Jese Holding in which he was a beneficial shareholder.  The bank continued paying rent to that company and he also received house allowance. He also took a loan of Sh1.5 million from the bank to renovate the house.

Karissa said there was a debate within Cooperative Bank on how to settle Mureithi’s tax dues but it had not found it fitting to take him to court. It was the Board of Directors that decided to take the matter to court to recover the money.

Mureithi testified on April 26 and 27, 2012 and also in September and October same year. He said he was not aware of the KRA audit until he was served with court papers. He was never invited to take part in the audit. He said the KRA letter was never brought to his attention. He was never given any notice of tax liability. He maintained that at retirement, he had received all his benefits with all the taxes deducted.

Employee’s salaries

Mureithi pointed out that under the terms of employment, he was to receive all his benefits at no cost to himself, including the taxes. As layman, he understood this to mean the bank would cover the taxes and his take home would not be affected. He said no one raised issue with his terms of employment.

Mureithi argued that the bank had admitted having failed to carry out its statutory mandate to make the deductions hence it could not pass the responsibility to him.

Judge Havelock held that it was incumbent upon the bank to make the deductions on the salary and allowances.

Section 37(1) of the Income Tax Act makes it a duty and an obligation for an employer to deduct and account for taxes from an employee’s salaries, emoluments and allowances. The law imposes a penalty to an employer who fails to comply. A similar obligation is made to the employer under the Employment Act.

“According to the Income Tax Act and the Employment Act, it’s the sole responsibility of the employer to make any deductions, statutory or otherwise and remit the same on behalf of the employee,” he held. “Failure by the employer to exercise its statutory mandate is not excusable.” “By maintaining that the defendant was aware or ought to have been aware that he received remuneration without deductions, the plaintiff is shooting itself in the foot given that it admitted to making deductions on some benefits but not on others,” the judge said.

Foot tax

The judge, however, rejected Mureithi’s explanation that he was unaware of his tax liability.

“One only has to read the defendant’s impressive profile to see that he is a man well-versed in the ways of business world as well as the world of politics,” Judge Havelock noted.  “In my opinion, he knew or must have known that the extensive emoluments he was enjoying as a result of his employment would be subject to taxation.”

The court analysed the facts and concluded that Cooperative Bank was not entitled to foot the tax for his motor vehicle, insurance policy as well as education and airfare for his children.

“I do find that the defendant is under a duty to refund the money as paid by the plaintiff to the KRA,” the judge concluded.

The court ordered Mureithi to pay Cooperative Bank Sh11.2 million plus interest at court rates from the date the case was filed on March 31, 2003 as well as costs of the suit.

The writer is a court reporter with the Standard Group

Email: [email protected]

Parliament Cooperative Bank Erastus Mureithi KRA
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