Civil Reference No. 7 of 2004
The appellant, John Epimaki Kessy, owned Plot No. 21, Mikocheni Light Industrial Area, Dar es Salaam, since 1992, using it for his sole proprietorship business, J.E. Construction. In 1999 he and one Beda J. Kessy incorporated J.E. Construction Company Limited, with the appellant holding 99% of the shares, making him an 'associate' of the Company under section 3(c) of the Income Tax Act, 2004. The Company took over the business, and in April 2011 the appellant transferred the property to the Company after Commissioner for Lands' approval. Under section 39(a) of the Act, this transfer was a realisation attracting capital gains tax under section 36, computed per section 44(1) unless the transferor qualified for relief under section 44(2), which required both parties to elect in writing and satisfy conditions in section 44(4), including subsection (4)(e) requiring a written election by both the transferor and the associate. The appellant lodged a declaration of gain (exhibit A4); the respondent queried it and vacated earlier assessments (exhibit A5), later issuing Assessment No. 8986. The appellant's tax consultants objected (exhibit A6), asserting compliance with section 44(2) and claiming to have attached the appellant's election letter. The respondent rejected the objection. The Board dismissed the appellant's appeal, finding no evidence of compliance with section 44(4)(e), though it ordered a fresh assessment based on 2011 market value. On appeal, the Tribunal refused to admit an additional document (annex JEK-10, an election letter) under section 17(2) of the Tax Revenue Appeals Act (TRAA), holding the appellant failed to meet the conditions for admission of additional evidence and that the application was an afterthought. The Tribunal dismissed the appeal, prompting this further appeal to the Court of Appeal.
1. Whether the Tribunal properly exercised its discretion in refusing to admit additional evidence (annex JEK-10) under section 17(2) of the TRAA. 2. Whether the Tribunal erred in holding that the appellant had not complied with section 44(4)(e) of the Income Tax Act, 2004, so as to qualify for the tax treatment under section 44(2) of the Act.
The appellant, through counsel, argued that the Board raised the issue of non-compliance with section 44(2) suo motu without affording him a hearing, thereby breaching his constitutional right to be heard under Article 13(6)(a) of the Constitution, and that this justified admission of additional evidence (the election letter, annex JEK-10) before the Tribunal. Counsel contended the letter was not new since it was allegedly part of exhibit A6 already before the Board, so no prejudice would result from its admission, and that there was ample evidence—via a letter dated 10/07/2011 received by the respondent—that both the appellant and his associate had complied with section 44(4)(e). The appellant urged the Court to allow the appeal and set aside the Tribunal's refusal to admit the additional evidence.
The respondent, through the Senior State Attorney, argued that the appellant failed to satisfy the established conditions for admission of additional evidence, relying on As Sajan v. Co-operative and Rural Development Bank [1991] T.L.R. 44, which sets out three conditions for such admission. The respondent contended that evidence of compliance with section 44(4) never featured before the Board and was introduced only as an afterthought after the Board's adverse decision, and that the Tribunal was correct to refuse its admission. The respondent asked the Court to dismiss the appeal with costs.
The Court of Appeal dismissed the appeal with costs, upholding the Tribunal's exercise of discretion in refusing to admit the additional evidence. Applying the principle from Mbogo & Another v. Shah [1968] E.A. 93 (as adopted in Commissioner General, TRA v. New Musoma Textile Limited), the Court held that an appellate court will not interfere with a lower tribunal's exercise of discretion unless it is shown to be clearly wrong through misdirection, reliance on irrelevant matters, or failure to consider relevant matters. The Court found no such error by the Tribunal. It held that the letter referred to as annex JEK-10 was, in substance, already part of exhibit A6 before the Board, making its 'additional' admission futile; the truly relevant letter (from J.E.R. Construction Co. Ltd, at page 67 of the record) was not shown to have been part of exhibit A6, and no explanation was given for its omission earlier. The Court further held that the question of the appellant's compliance with section 44(2) and 44(4) of the Act was inseparable from the applicability of section 44(2) itself, which was squarely part of the appellant's case before the Board; thus, there was no denial of the right to be heard. Finally, applying the credibility test for admission of additional evidence discussed in As Sajan's case, the Court found that the letters relied upon were written and submitted to the respondent only after the tax assessment had already been made, contrary to the logical requirement that an election under section 44(2) be made prior to assessment. Consequently, the appellant failed to meet the conditions precedent for admission of additional evidence, and the Tribunal's refusal was upheld.
This judgment reaffirms the restrained appellate standard of review for discretionary decisions of tax tribunals regarding admission of additional evidence, applying the Mbogo v. Shah principle that appellate interference is warranted only where the tribunal misdirected itself, considered irrelevant matters, or ignored relevant ones. It also clarifies, in the tax context, that an election for relief under section 44(2) of the Income Tax Act, 2004 (protection for transfers between associates) must be made prior to the tax assessment, reinforcing that post-assessment attempts to introduce such elections lack the necessary credibility and relevance for admission as additional evidence. The decision further underscores that a taxpayer's compliance with statutory conditions for tax relief (here section 44(4)(e)) is treated as inseparable from the applicability of the relief provision itself, meaning objections and evidence on applicability necessarily encompass the compliance question, precluding claims of a denial of the right to be heard when compliance evidence was not adduced at the appropriate stage before the Board.
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