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Why KRA lost Sh27m tax claim against AA Kenya
The gist of the case was whether driving school learners having paid fees were members of AA and whether their money was subject to taxation as income to AA.
The taxman has suffered a blow in a bid to collect Sh27 million corporate income tax from the Automobile Association of Kenya (AA).
This is after the High Court upheld findings of the Tax Appeals Tribunal that AA qualifies to be described as a members' club and was entitled to enjoy tax exemption under the Income Tax Act.
The gist of the case was whether driving school learners having paid fees were members of AA and whether their money was subject to taxation as income to AA.
"That question was answered by the tribunal in the affirmative. The court finds nothing erroneous, as to be perverse, with the decision and finds that being called upon to re-evaluate the evidence afresh on a second appeal is beyond its jurisdiction," said Justice Patrick Otieno.
The Kenya Revenue Authority (KRA) made the tax claim after conducting a verification exercise on the AA’s operations covering the financial years 2016 to 2020, which resulted in the issuing of a Corporate Income Tax (CIT) assessment amounting to Sh27 million.
The claim was on the basis that AA did not qualify to be a members’ club under the Income Tax laws because more than half of its gross income was derived from driving school learners, who did not qualify to be members.
According to KRA, driving school learners were not members because they receive only temporary access and their membership cards are for specific services (not asset entitlement).
Additionally, the taxman claimed that the learners' motive is training and not club membership, they lack vetting/long-term commitment, and that AA was not expressly registered as a members’ club. Hence, it said AA could not enjoy the tax exemption that is available to members’ clubs.
AA, which is a century-old organisation, was aggrieved and appealed to the Tax Appeals Tribunal, arguing that the tax assessment was wrong.
It argued that learners are registered as ordinary members, pay membership subscription fees, receive membership cards, access facilities, attend AGMs, and have voting rights as per its Constitution, and are not excluded from asset entitlement upon liquidation.
The organisation pointed out that its Constitution classifies members into Honorary, Life, and Ordinary members, and no member could be registered outside these categories or granted temporary membership.
The tribunal ruled in favour of AA, by finding that the organization maintained different classes of members, namely honorary, life, and ordinary members.
It ruled that the driving school learners were classified as ordinary members of the association.
KRA, through the Commissioner of Domestic Taxes, was dissatisfied with that ruling and escalated the dispute to the High Court, where it argued that the tribunal erred in law and fact in holding that the AA’s driving school learners met the threshold of a “member”.
But Justice Otieno found that the imposition of tax, having been solely based on the position that a category of AA's members was not such members, has no basis to ground the tax assessment.
The court found no error in the conclusions by the Tribunal to merit its intervention. It dismissed the appeal.
Justice Otieno noted that the Tribunal made its findings after analyzing AA's constitution, registration documents, sample membership card, access card, application form, and invoice. It established that AA maintained different classes of members and that the learners were classified as ordinary members.
