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The Tax Appeal Tribunal has accepted an appeal by hospitality firm, Hemingways Watamu Limited challenging a Sh944 million tax claim by Kenya Revenue Authority (KRA), from an investment in the construction of a hotel and apartments in Kilifi County about six years ago.
The hospitality company is in the business of hotel services, fishing, and Safari Centre trading as Hemingways Resort.
Hemingways built a hotel and apartments in Watamu in 2018 for Sh629,357,254 and later claimed Sh944,035,881, being 150 percent of the total construction cost as part of the investment deduction allowance policy to hotel buildings, buildings used for manufacture, and machinery used for manufacture.
As part of the Income Tax Act policy to entice investments, firms investing more than 200 million outside Nairobi, Mombasa and Kisumu enjoy a 150 percent tax deduction on money invested in hotel buildings, buildings used for manufacture, and machinery used for manufacture.
Hemingways said that from the provisions of the Income Tax law, it was right to claim the 150 percent investment deduction of its investment.
KRA, however, said that during a returns review, it noted that the applicable rate in Hemingways’ project was 100 percent and not 150 percent as claimed by the hotelier and therefore proceeded to disallow the over-claimed amount of Sh 314,678,627 for the period 2018.
The KRA review resulted in an adjusted investment deduction claim of Sh417,351,449 and Sh30,201,052 for the period 2018 and 2019.
The taxman claimed that the 150 percent claim is only applicable to persons who satisfy both conditions of having a building and installing machinery therein as provided under the second schedule paragraph 24 (1) (f) of the Income Tax Act.
In a judgement, the Tax Tribunal sided with Hemingways and faulted the taxman for twisting the law.
The Tribunal chaired by Robert Mutuma said KRA erred in disallowing costs incurred by Hemingways in the construction of the hotel in Watamu.
“The upshot of the foregoing is that the Appeal has merit and therefore succeeds. Consequently, the Tribunal makes the following Orders: -a) The Appeal be and is hereby allowed; b) The Respondent’s Objection Decision dated October 5, 2023, is hereby set aside;” the Tribunal.
The Tribunal finds that contrary to the Respondent’s assertion that the provision only applies to buildings used for manufacture, Paragraph 24 (3) (d) of Part I of the Second Schedule to the Income Tax Act provides a further definition of the term building as any building structure, then enumerates civil works and other structures that qualify as buildings in the case of buildings used for manufacture,” the Tribunal said in its judgement on October 4, 2024, noting that this provision does not exclude a hotel building from the definition of the term ‘building’.
“It follows that the Appellant, having incurred qualifying expenditure of over Sh. 200,000,000 in the construction of a hotel building in Watamu, Kilifi County, being outside the City of Nairobi or the Municipalities of Mombasa or Kisumu, was allowed to deduct investment deduction at the rate of 150 percent of the qualifying capital expenditure and the associated construction costs were allowable” it said.
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