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REPUBLIC OF KENYAIN THE TAX APPEALS TRIBUNAL
TAX APPEAL NO.63 OF 2015
CORPORATE INSURANCE COMPANY L1MITED APPELLANT
=VERSUS=
THE COMMISSIONER OF DOMESTIC TAXE RESPONDENT
BACKGROUND:-
1. The Appellant, Corpo te Insurance Company is a Kenyan company
duly licensed to tra 7
business and is a registered taxpa
term insurance
2. The Respondent is established under the Kenya Revenue Authority
Act~(Cap 469) of the Laws'pf Kenya, charged with the mandate to¥':;-' ."". ~
"'~dminist Tax regime on If of the Government of Kenya.
3. The Respondent undertook an audit of the Appellant's financial
performance, pursuant to which they held various meetings and
exchanged correspondence at the conclusion of which the audit
findings were formally communicated to the Appellant on 20th
September 2013 and the additional assessment numbers
0352009900162/4 and 030520100126/4 were issued for the years of
income 2009 and 2010 respectively.
Judgement Appeal No. 63 of 2015 (Corporate Insurance Company Limited) page 1
4. The Appellant had provided the Respondent with a schedule of bad
and doubtful debts provisions from 2007 to 2012 years of income for
the purposes of the audit after the Respondent had issued a notice of
intention to audit the Appellant on 20th February 2013
5. The Appellant objected to this assessment)Hrough their letter dated
18th October 2013, which the Responden ter confirmed through its
letter dated 28th July 2014.
6. The Appellant being aggrieved b:y· the de ision and ConfirmationNotices dated 28th July 2014 issued by the Respori ent pursuant toSection 85 of the Income Tax Act cap 470 of tf aws of Kenyamoved the Tribunal 0, eal.
7. The Appellant's Appea s "year of income 2010 were firsCommittee on 9th September 201
f'
ears of income 2009 and theA-ttie Clerk to the Local
I. The additional assessments of Kshs.942,114/= being business~ ~acquis!.~tio_.n costs. ." '\:~~~411.", The ai~ '0wance/overstat ',ent of bad debts provision amounting
to Kshs.8,o "1,086 in the year of income 2009
III. The disallowance/o~rstatement of bad debts provision amountingto Kshs.959,266.90 in the year of income 2010
The Tribunal shall make its determination on both issues on Appealseparately.
THE APPEAL
8. The Grounds of Appeal presented in the Amended Memorandum ofAppeal filed on 27th April 2016 are;
Judgement Appeal No. 63 of 2015 (Corporate Insurance Company Limited) page 2
i) The Respondent misguided himself by bringing to chargeKshsA, 127,1888/= in the Appellant's additional assessment termingthe amount as marketing expense while it was an allowable deductionincurred by the Appellant in paying rates for his property alongKiambere Road, Upper hill which houses the Appellant's Head Officeand rent for St. Ellis House in Nairobi CSD from where the Appellant'sLife Insurance Department operates.
Appellant to tax onr bad and doubtful debts,
f Income Tax Act Cap
ii) The Respondent erred in chargingKshs.14,401282/= which was a prov',~ia deduction allowed under Section ~15(2}470.
iii) The Respondent failed to understand that the Directors of the~
Appellant were fully aware of the bad and doubtfu e t which wasan insurance industry E2~'blem.
iv) The Respondent did n ' s~a~th,at the provision for bad debts~ """'-~amounting to Kshs.14,401 ,282/ "ilwas createtlt'by the Appellant after
receiving professional advice ~rom the AJrellant's external auditors,M/s Delloite & Touche.
"~v) THat title Appellant had taken all. reasonable steps to collect the debt
tif'#V ~1,({<~.' ~ . ~" ...vra corre.s~~li:ldence, meetmg ~Jt,· the debtors, arbitration etc withoutany success.
a. The Appellant. set up a proviston for doubtful debts when adebtor demonstrated that he was not prepared to pay the debtby such tactics as, raising an incorrect counterclaim whichexceeded the debt or in some cases where the Debtors madeunjustified claims and accusations to the Insurance RegulatoryAuthority against the Appellant.
Judgement Appeal No. 63 of 2015 (Corporate Insurance Company Limited) page 3
b. The Appellant set up a provrsion for bad debts when itexhausted all other collection steps including taking the debtorsto court and the debts remained uncollectable.
vi) In the Alternative the Appellant argues that the Respondent misledhimself in raising the additional assessment to charge the Appellant totax on the bad debt amounting to Kshs.14,401 282/= because;
a. During the audit, the Appellant deverbally and with documentardebtors had ceased operatio ,sdebts which had become unc lIectab
b. The Appellant had demonstrated and g yen evidence to theRespondent that the matters of debts that Had een filed incourt had not n heard and concluded that the Appellantcould not haste e process because it could not control thecourt calendar.
c. Some of the debts had been incurreCl 1r far back as the year ofinc9me 2002 and the Appellant as unable to locate the
~debtors as some of 'thern had given their business to other
. I C-'orToll?etlng nsurance om ales.
d. Som otor vehicles o'<ijners took directly from the Appellantinsurance cover for their vehicles but disappeared after theyfailed to' pa~ forpbalances of the premium thus making theAppellant incu'debts amounting to Kshs.400,0001= whicheventually became uncollectable.
vii)The Appellant having made a provision, the Respondent would notlose revenue because whenever any of the provided for debt wasrecovered, it was treated as premium income and taxes paid accordinglyas part of the annual corporate taxes as in the case of Mis AssuredInsurance Brokers Ltd.
Judgement Appeal No. 63 of 2015 (Corporate Insurance Company Limited) page 4
viii)That in spite of the exhaustive and reasonable steps taken by theAppellant, it was only able to collect Kshs.600,0001= from Mis.Assured Insurance Brokers Ltd leaving an uncollectable debtamounting to Kshs.13,801,282/=.
ix) The Appellant shall request the Tribunal at the hearing to invite theAppellant's Chief Executive Officer and the Chief Accountant to attendthe hearing as witnesses and give evi sae ineluding producingdocuments if the Tribunal believes vidence shall assist in itsdeliberation as empowered under x Appeals Tribunal 2013Section 17.
In its Response and Amend MemoraRespondent addressed each groundfollowing issues for determination;
of Appeal theraised the
9.
i) Whether bad debexpenses for tax pur
are allowable
marketing and b JxS development costs in 2009, whichexpenses, inc~~ ed on behalf of third parties incurredxelusively in the production of business income are
The Matter was listed for; earing on 10th June 2016 where both parties werepresent.
APPELLANT'S CASE
10. The Appellant avers that at all material times it took steps toendeavor to collect the outstanding debt by pursuing the debtorsdirectly and through the litigation. The Appellant further submits that
Judgement Appeal No. 63 of 2015 (Corporate Insurance Company Limited) page 5
some of the debtors have since ceased operations thus making itdifficult for it to pursue recovery of the outstanding debts and in thecircumstances it had to declare them as bad and doubtful debts. At thesame time, it submits that it is unable to determine the time it will taketo collect in full the claim before the Court. However it will bring intotax every recovery made. In its submissions it avers that no loss shallbe incurred as financial statements always reflect all income of theAppellant.
RESPONDENT'S CASE
11. The Respondent avers that;
i) The Appellant overstated in relation to bad anddoubtful debts provisions. The law requires that onlyexpenditure incur~~d wholly and exclusively 11 ne productionof income is aIl6
ti
,-, ,'- eduction against tha rncorne.
ii) The bad debt list, 'totaliri As.l5~H76.000/= as per auditedaccounts for the year of infie 2009 differed by
~ ?Kshs.8, 751,086/= with tlie supporting list of Kshs.7,114,914/=.Equally the bad debt totaling Kshs.14,401,282/= as per audited
P' accounts for the year of income 2010 differed byKsh~~9'5 ,267/= with th pporting list of Kshs.13,442,015/=,That tHe total bad debts provision did not meet the strictrequirements of Income Tax Act Cap 470 Section 15(2)(a) in thatno evidence was adduced at the time of audit on efforts madeto collect the debt.
iii)
iv) Marketing expenses amounting to Kshs.900.000/= were paid incontravention of the Insurance Act
ISSUSES FOR DETERMINATION
12. The Tribunal decided to summarize the issues into three.
Judgement Appeal No. 63 of 2015 (Corporate Insurance Company Limited) page 6
i) Whether the Appellant overstated its expenses relating to badand doubtful debts for the years of income 2009 and 2010.
ii) Whether the Appellant made exhaustive efforts to collect theoutstanding debts for the years of income 2009 and 2010.
Hi) Whether an expense of Kshs.900,000/= incurred in the year2009 qualifies to be treated as allowable expenditure for taxpurposes
ANALYSIS AND FINDINGS
13. The Tribunal after hearing both parties suomissions, the law pertainingthereto and authorities cited tHereby, the ibunal makes thefollowing findings; it is not in disp1e that the ,ellant is a taxableperson and not i1jItax exempt by dint of any leglslati
a) Whether the Appellan overstated its expenses relating to bad anddoubtful debts for the years of income 2009 and 2010.
- ~
14. Upon dist~rning the i~'sues / ination, the Tribunalcommen~ its analysis of th ase with tbe following observation thatthe matter for determination is treatment of bad debts and whatexpenses qualify to be treated~ as tax allowable expenses. In
etermim the matter of b nd doubtful debts, the Tribunal has"-
evaluated the averments, th oral presentations by both parties andwritten submissions.
15. The Tribunal is in agreement with both parties that bad and doubtfuldebts are allowa~~ deductions under section 15(2)(a) of the incometax Cap 470 laws of Kenya upon satisfying the Commissioner thedebts have become bad. This further strengthened by the followingefforts made to collect the debts.
Evidence adduced by Appellant to collect the debts included: -
a. letters from its legal department to their debtorsJudgement Appeal No. 63 of 2015 (Corporate Insurance Company Limited) page 7
b. lawyer's letters,
c. court cases
d. NIC bank letters cancellations of the various policies andrequesting refunds of premium.
b) Whether the Appellant made exhaustive efforts to collect theoutstanding debts for the years of income 2009 and 2010.
16. It is evident that recovery of some debt IS both time consuming andexpensive. The Appellant has been /a&" demonstrate some of theefforts it has undertaken to collect t~ bad ebts. The Appellant wrotea letter to Azani Insurance Agencies dated 29th February 2008. TheAppellant also filed a case against Rftk Managemelnsura ce BrokersLtd in Milimani Court RMCC No 6512 of 2009.
17. These efforts expended y the Appellant were in con onance with theprovisions of Section 15(2) (a) of tne come Tax Act Cap 470 whichrequires that a person must-take altlttn ""lDlesteps to collect debts
'1 ' dI!f: .which havt ecome uncollectablt?
Il'
18. The matter to determine is wnether there was an overstatement of badanf.d0~btful debts provisions, review of the Appellant's own extract
40f their '~"clited Accounts JI~ted incidents of expensing and"';roviding fo the same bad debts in more than one financial year this
resulted in over expenditure of Kshs.8,761,086/= in the year 2009 andKshs.959,266.90 in Hie year 2010. The accounts reflect bad debtswritten off which 9~e~0Ilected in subsequent years and written back to
~0f1i
income; hence taxable.
c) Whether an expense of Kshs.900,000 incurred in the year 2009qualifies to be treated as allowable expenditure for tax purposes
19. On the expenses paid to solicit for business the following observationswere made. The amounts were not in strict adherence to the
Judgement Appeal No. 63 of 2015 (Corporate Insurance Company Limited) page 8
Insurance Act CAP 487 Laws of Kenya. Which states that anyremuneration above or besides that which is stipulated and allowed inthe governing statute would be prohibited. It was further noted thatno Withholding Tax was held in relation to the same expense.
20. The Tribunal finds that the Appellant ought to have paid tax on themarketing expense and therefore the Respo dent's acted within thelaw in disallowing the expense and the tax j erefore payable on thesum of Kshs.900,0001 = '"0/'
I. Bad and doubtful debts provisions are tax allo
FINDINGS
21. With respect to issues for determas follows»
II. That bad debtsincome 2009 be
of kshs.7,114,9141 for the year ofenses for tax purposes
III.
VI. expense of Kshs.900, 0001= is disallowed for
VII. Each party to bear its own costs
Judgement Appeal No. 63 of 2015 (Corporate Insurance Company Limited) page 9
DATED and DELIVEREDat NAIROBI this .. l0§ay of ::;!.':-!.~l 2ot7
In the presence of: ("~5~~~-L ..~~·.?\:~:L for the Appellant~~\)~N \Qi- CJu~'0~~ j
~-df.;b~..~.~~.A:'~~.for the Respondent
~
LI·LiAN Rsm'EE·oMaN Df~MEMBER
Judgement Appeal No. 63 of 2015 (Corporate Insurance Company Limited) page 10