Judgment summary
The Tribunal considered an appeal by Nextgen Mall Management Company Limited against an objection decision dated 2nd December 2025, which sustained additional income tax and VAT assessments totalling Kshs. 119,873,193.00 (paragraph 9).
The Tribunal found that the service charge and member contributions collected by the Appellant were pass-through fiduciary funds held on behalf of the unit owners for the settlement of common area outgoings, and did not constitute income chargeable to income tax under Section 3(2)(a)(i) of the Income Tax Act (paragraphs 54, 77).
The Tribunal further found that these contributions did not constitute consideration for a taxable supply by the Appellant under Sections 2 and 5(1) of the VAT Act, since the actual management services were rendered and invoiced by third-party property managers who charged and accounted for VAT (paragraphs 79, 83).
The Appeal was allowed and the objection decision dated 2nd December 2025 was set aside, with each party bearing its own costs (paragraph 84).
Background
The Appellant, incorporated in Kenya on 18th June 2010 under the repealed Companies Act (Cap 486) as Nextgen Centre Management P Limited and renamed Nextgen Mall Management Company Limited on 14th July 2016, was established to manage the common areas of Nextgen Mall along Mombasa Road, Nairobi, on behalf of unit purchasers from the developer, Nextgen Office Suites Limited (paragraph 1).
The Respondent selected the Appellant for audit after noting it declared income in its Income Tax returns but was not registered for VAT. The audit covered income tax and VAT affairs for 2016 to 2020 and culminated in a notice of audit findings dated 18th August 2021 (paragraph 3).
By a notice of tax assessment dated 18th August 2022, the Respondent assessed additional income tax of Kshs. 38,550,556.00, registered the Appellant for VAT under Section 34(6) of the VAT Act, and assessed VAT of Kshs. 81,322,637.00 for 2017 to 2020, aggregating Kshs. 119,873,193.00 (paragraph 4).
The Appellant's objection dated 7th September 2022 was fully rejected by an objection decision dated 3rd November 2022 (paragraph 5). The Appellant's subsequent appeal, Tax Appeal No. 1496 of 2022, was dismissed by the Tribunal in favour of the Respondent (paragraph 6).
On further appeal to the High Court (HCITA No. E173 of 2024), a judgment delivered on 9th October 2025 set aside the rejection of the objection and directed the Commissioner to review additional documents and issue a fresh objection decision within sixty days (paragraph 7). The Appellant provided sample service charge reimbursement bills, expense invoices, sale agreements and correspondence by 14th October 2025 (paragraph 8).
The Respondent issued a fresh objection decision dated 2nd December 2025, again fully rejecting the objection and sustaining the aggregate assessment of Kshs. 119,873,193.00, which is the subject of this appeal (paragraph 9).
Core dispute
The Appellant argued that it is a non-profit management company holding a reversionary interest for unit owners, that the service charge and member contributions it collects are not its income but funds applied towards common area expenses, and that it renders no taxable supply since its membership and beneficiaries are one and the same (paragraphs 12 to 27).
The Respondent argued that the Appellant's constitutive documents show active management functions constituting a business under Section 3(2)(a)(i) of the Income Tax Act, that the contributions were declared as income in the Appellant's own returns with surpluses retained, and that the Appellant exceeded the VAT registration threshold under Section 34(6) of the VAT Act, warranting the assessments (paragraphs 32 to 42).
The issues for determination were whether the service charge and member contributions constituted income chargeable to income tax, and whether they constituted consideration for a taxable supply chargeable to VAT (paragraph 44).
Court findings
The Tribunal examined the sale agreements, the agreement of 15th February 2018, the Appellant's Memorandum and Articles of Association, and invoices from third-party property managers (Davita Management Limited, Broll Kenya Limited and RDL Property Managers Limited), finding that the Appellant's role was confined to collecting and remitting contributions within a tripartite management structure, rather than pursuing trade (paragraphs 47 to 51).
The Tribunal found that surpluses and deficits were transferred to a revolving fund credited to the owners, and that the Appellant had no employees, paid no salaries or dividends, and retained no fee or margin (paragraphs 53 to 54).
Applying principles from IFRS 15, the Conceptual Framework for Financial Reporting, IAS 1, IAS 7, IAS 24 and IAS 32, the Tribunal held that the Appellant had misstated fiduciary funds as its own income and expenses in its financial statements and returns, but that this presentation error did not alter the true legal character of the receipts, which remained fiduciary funds held for the unit owners (paragraphs 58 to 67).
The Tribunal held that liability to tax is imposed upon the true nature of a transaction and not upon accounting entries, and that the absence of a tax exemption certificate was immaterial since an exemption presupposes income that would otherwise be chargeable (paragraphs 66, 69).
On VAT, the Tribunal found that the services at the premises were rendered and invoiced by third-party providers who charged and accounted for output tax, and that the Appellant's receipts were reimbursements of costs rather than consideration for any supply of its own, meaning the forced VAT registration under Section 34(6) of the VAT Act was without foundation (paragraphs 79 to 81).
The Tribunal rejected the Appellant's alternative reliance on the welfare and philanthropic association exemption under Paragraph 11 of Part II of the First Schedule to the VAT Act, finding it inapplicable, but held that the appeal succeeded because there was no taxable supply by the Appellant at all in respect of the contributions (paragraph 82).
The Tribunal clarified that income earned by the Appellant on its own account from the Kiosk and the Maasai Market remained chargeable trading income, uncontested and already declared (paragraphs 72 to 73).
Outcome
The Tribunal found the Appeal merited and allowed it. The Respondent's objection decision dated 2nd December 2025 was set aside, and each party was ordered to bear its own costs (paragraphs 84 to 85).
Major issues / areas of contention
- Whether the service charge and member contributions collected by the Appellant constituted income chargeable to income tax under Section 3(2)(a)(i) of the Income Tax Act
- Whether the service charge and member contributions collected by the Appellant constituted consideration for a taxable supply chargeable to VAT under Sections 2 and 5(1) of the VAT Act
- Whether the Appellant's own erroneous financial statement presentation of fiduciary funds as income converted those receipts into taxable income
- Whether the absence of a tax exemption certificate was material where the receipts were not income at all
- Whether the Appellant's forced VAT registration under Section 34(6) of the VAT Act was properly founded