Gratuity Is Not Liable To Personal Income Tax Says Tax Appeal Tribunal

Nairalaw

The Tax Appeal Tribunal has on the 20th day of June, 2019 ruled
that gratuity is not liable to personal income tax. This decision
by the tribunal was made in the case between Nigerian Breweries PLC
and Abia State Board of Internal Revenue in appeal number
TAT/SEZ/002/17

SUMMARY OF THE CASE
Abia State Board of Internal Revenue notified Nigerian Breweries
PLC of its intention to commence an audit exercise for the years
2014-2015 in relation to Pay-As-You-Earn (PAYE) and withholding tax
as well as the appointment of tax consultants – Yesufu Ahmed &
Co – to carry out the audit. Upon conclusion of the audit exercise,
the Abia State Board of Internal Revenue issued an assessment in
the sum of Ten Million, Forty-Nine Thousand, Six Hundred and
Forty-Four Naira, Forty-Five kobo (N10,049,644.45). The assessment
comprises outstanding PAYE obligations including penalties and
interests.

In response to the assessment, Nigerian Breweries Plc stated
that the assessment was wrong in law because:
(a) Abia State Board of Internal Revenue did not take into account
statutory reliefs such as interest on mortgage loans, pension
and
(b) life insurance and consolidated tax reliefs were not properly
computed
in response, Abia State Board of Internal Revenue requested for
more information from the Nigerian Breweries Plc following which it
issued a revised assessment dated 24th April, 2019 revising the
Nigerian Breweries Plc’s tax liability from (N10,049,644.45)to
Three Million, Two Hundred and Sixty-Three Thousand, Eight Hundred
and Thirty-Seven Naira, Ninety-Two kobo (N3,263,837.92). in
arriving at the reassessment, the Abia State Board of Internal
Revenue subjected gratuities paid by the Nigerian Breweries Plc to
its retired employee to tax
the appellant again objected to the reassessment on the following
grounds:
(a) gratuity which was subject to tax under the 1993 Personal
Income Tax (PITA) was no longer subject to tax by virtue of the
Finance (Miscellaneous Taxation Provisions) Decree No. 32 of 1996
which deleted gratuities from chargeable income
(b) the effect of the deletion rendered schedule 3, paragraph
18(b), to the PITA, which subjected gratuities in excess of One
Hundred Thousand Naira (N100,000) since gratuity was no longer
taxable
in response to the Appellant’s objection, Abia State Board of
Internal Revenue served the Appellant with the Notice of refusal to
Amend (NORA), the appellant then appealed to the Tax Tribunal
seeking tow reliefs:
a) an order discharging the assessment noticen issued by the Abia
State Board of Internal Revenue and
b) a declaration that by virtue of Decree 1996 all gratuity are tax
exempt

DECISION OF THE TAX APPEAL TRIBUNAL
The tribunal first determined the second relief and instantly
refused same. It held:
“since this appeal is determinable under PITA, Cap P8 LFN, 2004 and
knowtowing to the maxim of les posterior derogat priori (meaning, a
later law takes precedence over an earlier one) the tribunal does
not deem it necessary to grant this relief and it is hereby
refused.”
On the first relief, the court began by producing the provision of
section 3 of PITA which provides thus:
Subject to the provisions of this Act, tax shall be payable for
each year of assessment on the aggregate amounts each of which is
the income of every taxable person, for the year, from a source
inside or outside Nigeria, including, without restricting the
generality of the foregoing-
(a)…
(b) any salary, wage, fee, allowance or other gain or profit from
employment including compensations, bonuses, premiums, benefits or
other perquisites allowed, given or granted by any person to any
temporary or permanent employee other than so much of any sums as
or expenses incurred by him in the performance of his duties, and
from which it is not intended that the employee should make any
profit or gain

Paragraph 18 of 3rd schedule of the Act provides
that
Gratuities payable to an employee in the private sector in respect
of services rendered by him under a contract of service with his
employer and described as gratuities either in the contract or some
other document issued by or on behalf of the employer in connection
with such contractor:
Provided that-

(a) ….
(b) where the total gratuity payable exceeds the amount of N
100,000 the amount of any excess shall not be so exempt but shall
be deemed to be income of the employee on the last day of his
employment, including any terminal leave arising therefrom;
(c) where the period of service (or where service is not
continuous, the aggregate period of service in any 63 consecutive
months) does not amount to five years, then, if the total
gratuities exceed a sum calculated at the rate o f N 1,000 per
annum for such period or aggregate period the amount of any excess
shall not be so exempt but shall be deemed to be income of the last
day of the employment, including any terminal leave arising
therefrom.
Every tax legislation has a chargeable section and the court after
reviewing replete of decided case outside Nigerian jurisdiction and
concluded that a chargeable section must have the following:
a) It is a foundation and condition precedent for any tax liability
to be imposed
b) Charging section guides the machinery sections of the enabling
law
c) A subject cannot be taxed unless the charging section clearly
and unambiguously imposes obligations
d) Tax obligation is based on it, any tax imposed outside it
amounts to imposing of fiction and
e) Absence of charging subject from the charging section summarily
discharges a wrongly assessed entity from tax liability.
A fortiori, since gratuity has been deleted or excluded from the
charging sections, it is safe to apply the maxim expression unius
est exclusion alterious (meaning, the express mention of one thing
means the exclusion of another). The court relied on Buhari v.
Yusuf (2003) LPELR-81 where the Supreme Court held:

“The principle is well settled that in the construction of
statutory provisions, where a statute mentions specific things or
persons, the intention is that those not mentioned are not intended
to be included. This is the expressio unius est exclusio alterius
rule, meaning that the express mention of one thing in a statutory
provision automatically excludes any other which otherwise would
have been included by implication.”

On the strength of this Supreme Court position and from other
judicial and statutory supports already mentioned or cited,”
gratuities” are automatically excluded from the charging section of
the PITA.

The tribunal further determined another question as to what
happens when the tax is not charged in the charging section but is
taxable wholy or partially in the schedule to the law. The court
opined that paragraph 18, 3rd schedule to the constitution which
provides that any amount on gratuity paid which is in excess of
N100, 000 is taxable contradicts section 3 of the PITA therefore
inapplicable to the Appellant and placed reliance on AC & ANOR
V. INEC (2007) LPELR-66(SC among others.
The tribunal further considered the mischief rule and asked the
following questions:

I. How did the law stand before the extant Personal Income Tax,
Cap P8 LFN, 2004?
II. What was the mischief for which PITA 2004 did not provide?
III. What remedy did PITA 2004 provide to cure the mischief?
The answers to these questions are obvious:
I. The stand of the law before the charging section captured in
section 3, PITA of 1993 was that gratuities were chargeable under
section 3 PITA
II. PITA of 1993 did not provide for exemption of gratuities from
personal income tax
III. The remedy provided by PITA 2004 was the deletion of
gratuities from the charging section of PITA of 1993 in order to
cure the mischief
So by applying the mischief rule of interpretation, the same result
enures, that is: Gratuities are tax exempt under the extant
Personal Income Tax Act. Issue (c) as framed by the tribunal
therefore, is resolved in favour of the Appellant.

Consequently, an order was made discharging the revised
assessment issued by the Abia State Internal Revenue to the
Appellant.

Representation
Folajimi Olamide Akinla of PWC Appellant
Obike Onyemere, Esq. Respondent

Subscribe ToNairalaw News!