Income received as compensation for termination of contract of employment

Durga Dass Bawa V Income Tax
The appellant paid Ksh 100,000 upon termination of distributorship agency, which was written as an exgrata payment. Thee commissioner assessed the whole sum to tax against which he appealed. It was held that the payment was taxable.

Southern Ireland tobacco union ltd vs. Mc Queen
The respondent was employee of appellant whose services had been terminated. He sued the appellant and was awarded damages for wrongful dismissal comprising four years salary. He appealed against the award arguing that it should have been reduced by the amount of tax payable thereon.Held, appeal be dismissed because although amount of income tax chargeable on damages for wrongful dismissal ought to be recovered. Award ought to be paid full award so that they pay tax on that compensation.

Justice Windham observed, “The sole question before us is whether the word compensation in the above paragraph can be held to include damages for damages can’t in any case be taxable till they are recovered before and paid to the plaintiff

Liquidator manzinde est. ltd vs. I.T commission.
The concern was whether the appellant who had agreed to pay a sum of money to a purchasing company in consideration of the purchasing company accepting full and complete liability in respect of claim made by some of its employees would deduct such a sum from its income for only and exclusively having been incurred in the calculation of its income.
Held: The Appeal is dismissed, as money was not a contingent liability or severance allowance for the year of assessment.
Sec 5 (2)a touches on loans given to employees or directors by deeming it to be a benefit if it is less than the market rate of interest and then applies a prescribed rate of interest

Sec 6 deals with income from use of property gains from royalties, rent, premium or similar consideration for use or occupation of property
Such receipts said to be income receipts if they do not lead to relinquishing or deducting of the capital asset itself-this would make proceeds to be capital gains, not income.

Dhanji v I.T Comm.
The appellants were property owners in Nairobi. They leased premises to four tenants, in addition to rent, tenants paid some premiums loosely known as goodwill and the commissioner assed premiums to tax and the issue was whether they were income or capital receipts. Held to be an income receipt and therefore taxable.

Sir Ronald Sinclair vs. Pobs
“There may be cases where granting of a lease is in substance if not in form, a disposal of the       lessors capital investment. In such a case, the sum representing the recoupment of this   capital will not be income and profit if any might be either a capital gain or income according   to circumstances. If this judgment is thought to work hardship to the taxpayer, income tax is such that it is useless to try to relate it to any standard of natural justice” 

By which way may a lessor dispose off all capital investment in   a lease in such a   way that disposal is not treated as a capital gain?

D Ltd vs. Commissioner of Income Tax.
The appellant was a landlord of a business premises, which he let out on a long lease. Tenants got permission to alter the premises on condition that they get them back to how they were at the end of the lease. At the expiry of the lease, tenants assessed cost of restoration work and paid the full value to the appellant. The commissioner later assessed the sum so received to tax arguing that it had exceeded expenditure actually carried out... The appellant upon unsuccessfully appealing, applied to the High Court which held that since alterations by the tenant had depreciated a capital asset, and payment was made to restore the asset to income producing condition, then this payment was a capital receipt and therefore not taxable, it being immaterial that the money had  not been spent.

Section 6 targets payment on income from the use of intellectual property e.g. patents, trademarks etc.
Income from dividends is taxed under section 7 and although Section 3(2) b touches on income tax and interests on dividends. Section 7 does not spell out the manner of taxing the same.
Section 10c covers the same and deems interest paid by a resident person as income that has accrued in or has been received in Kenya.   
Under section 7, any dividends received by a resident company is taxed as income of the year in which it is payable while paragraph c touches tax on any profits realized on a voluntary winding up of a company which are then distributed because they are deemed to be incomes from dividends.
Subsection d and e deem any debentures or redeemable preference shares issued by a company to its shareholders either at no payment or at a sum less than 95% of nominal value to be dividends valued either at nominal or redeemable value in the first place or in the second place at excess of nominal value in the issue price in the second place.
Consequent issue: Where a company is deemed to have issued dividends in the circumstance, tax will be charged on that company. In imposing tax on a company, the commissioner will be making the company to pay tax that may be due from shareholders because of shares received. When the company eventually, if at all distributes dividends to the same shareholders, it would be entitled to recover the debts paid from dividends due from each of the concerned shareholders, unless dividends, subsequently declared unpaid are far less than those deemed to hove been earned earlier.

The Finance Bill 1992 introduces compensation tax on dividends and requires companies to have an account (dividend tax account) where dividends are acquired from any company it is invested may also be entered. Section 7a

Interest income is targeted in section 10. Interest is defined in section 2 as any amount paid in any manner in respect of a loan, deposit, debt, claim or other right/obligation  or any premium or discount by way of interest, paid in respect of a loan, deposit, debt etc

Section 5 talks about qualifying interests as that which has fallen due and is the aggregate interest discount receivable by a resident individual, from a bank or other institution duly licensed. Some institutions are exempted from 1st schedule of Income Tax Act.

Income from pensions and Home Ownership Plans. Section 8 provides that any pension or annuity and any withdrawals from and payments out of a pension, provided or individual retirement fund.

Pensions are payments that have been saved for purposes of securing the life of workers in retirement and this becomes a security against the risk of living long after retirement and perhaps not able to afford the lifestyle one was accustomed to during employment.

Accumulated pension funds form important sources of investment capital and under section 15(2) b, I.T.A; the government encourages employees who will have formed schemes attached to employers to deduct any amount paid into the scheme as pension contributions on behalf of the employee. However, where contributions are being withdrawn to be used by the employee will become realized in the hands of the employee and then targeted for taxation with a humane face. Section 8(4) exempts the first 150,000 Kenya shillings from taxation. Section 8(5) goes on to set out rates of exempting other pension receipts.

-First 360,000 of a lump sum from a registered pension fund.
-First 360,000 paid out of N.S.S.F

Incase of a lump sum paid out of a home ownership plan, amount used to purchase an interest in the plan or construction of a permanent house for occupation of depositor, read in conjunction with the Retirement Benefits Act. Section 22 excludes a portion representing the capital element of an annuity from the definition of income under section 3(2).

Section 22 A limits the operations of section 16(2) d and e with respect to deductibility of contributions to an annuity by an employee or employee for defined contributions defined benefits and other retirement schemes sponsored by employees.

Section 12c Home Ownership Plans   


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