Garden City Mall Owners
The tribunal said holding property for a period for the value to appreciate and thereafter selling with the aim of making profit constitutes trade.

The Tax Appeal Tribunal has held that Ruaraka Diversified Investments Limited, a real estate company, is liable to pay Ksh672,150,686 in corporation tax arising from the sale of land in 2013 and 2015. The land was for the development of the Garden City project. The tribunal reached the decision in a ruling made on 1st April 2021.

Ruaraka Diversified Investments Limited is associated with private equity firm Actis, which sold the land on Thika Road where Garden City Mall stands and a separate property to Safaricom in 2015.

Tax Appeals Tribunal agreed with the taxman that Ruaraka Diversified Investments should remit the money to KRA because it failed to pay tax from profits of about Ksh1.4 billion earned in three transactions, after acquiring the land from East African Breweries Ltd (EABL).

The real estate company’s position was that the gain realized was in the nature of capital gains and that they had written to Kenya Revenue Authority seeking guidance as to whether Capital Gains Tax or Corporation Tax should apply in the subject transaction. The company’s argued that KRA’s response that capital gains was chargeable in such a transaction was a private ruling as provided in Sections 65-69 & 113 of the Tax Procedure Act, 2015 hence they had legitimate expectation that only capital gains would be charged for the transaction.

KRA’s position on the other hand was that the gain realized from the transfer of land to GC Retail Limited and Safaricom PLC was realized in the normal course of business operations of the real estate company and that the transaction was for the purpose of making profit, as such the proceeds of the sale of land was subject to Corporation Tax and not Capital Gains Tax.

In its judgement, the tribunal found that the investment company had made substantive misrepresentations to KRA when it sought for the private ruling as the transaction was not one-off and the nature of business of the company was developing and selling land hence no legitimate expectation could arise from the ruling.

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The tribunal noted that the company bought the 34-acre parcel for Ksh1.2 billion, improved it, and sold some 29.5 acres for a total of Kshh2.7 billion, making it liable to pay corporate tax on the additional income.

“The Tribunal notes in this case that the Appellant (Ruaraka) bought the land, subdivided it, improved its infrastructure and was able to sell it at a profit in a span of three years,” the Tribunal chaired by Josephine Maangi stated.

The tribunal further found that the action of holding property for a period for the value to appreciate and thereafter selling with the aim of making profit constituted trade. Subsequently the income realized by the taxpayer from the sale of land was business income and not capital gains.

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