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ΠΑΓΚΥΠΡΙΟΣ ΔΙΚΗΓΟΡΙΚΟΣ ΣΥΛΛΟΓΟΣ
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(1989) 3A CLR 393
1989 April 8
[STYLIANIDES. J.]
IN THE MATTER OF ARTICLE 146 OF THE CONSTITUTION
C.D. HAY PROPERTIES LTD,
Applicants,
v.
THE REPUBLIC OF CYPRUS, THROUGH THE COMMISSIONER OF
INCOME TAX AND ANOTHER,
Respondents.
(Case No. 563/85)
Judicial control - Taxation - Assessment of taxes - Interference by Court - Principles applicable - Court does not interfere if sub judice decision reasonably open to respondent.
Taxation - Income tax - Trading in land - A question of mixed law and fact - Criteria applicable to determine whether nature of transaction commercial or not - Onus to show that the sub judice decision was not reasonably open to the respondent.
In this case the main issue is whether profit derived from the sale of a building site and of a shop by applicants could be subjected to income tax. The object of the tax was determined under section 5(1)(a) and (f) of the Income Tax Laws 1961-1981.
The Court reaffirmed the principle that it will not interfere as far as assessment of tax is concerned, if the decision complained of was reasonably open to the respondent. The Court proceeded further to examine the merits of the case. Having stated that the question whether or not in a particular case trade has been carried by the purchase and sale of land is a question of mixed law and fact, the Court had this to say:
"There is no single test of general applicability for the determinationof the question whether an activity constitutes trade. The following however are relevant:
The character of the land purchased, the state of development and future potential, the manner of the finance of the transaction, the business knowledge of the tax payer, the length of the ownership, the frequency of the transaction or other transactions, the objects of a company as contained in its Memorandum and Articles of Association. The intention to trade maybe gathered from a great variety of facts and circumstances."
As, in the opinion of the Court, the sub judice decision was reasonably open to the respondent, the recourse was dismissed.
Recourse dismissed. No order as to
costs.
Cases referred to:
Savvas M. Agrotis Ltd. v. commissioner of Income Tax 22 C.L.R. 27,
Droussiotis v. Republic (Minister of Finance and Another) (1967)3 C.L.R. 15,
Philippou v. Republic (1983) 3 C.L.R.1836,
Makrides v. Republic (Minister of Finance) (1967) 3 C.L.R. 147,
HadjiEraclis and Another v. Republic (1984) 3 C.L.R. 604,
Ignatiou and Another v. Republic (1989) 3 C.L.R. 346,
Edwards (inspector of Taxes) v. Bairstow and Another [1955] 3 All E.R. 48,
Georghiades v. Republic (1982) 3 C.L.R. 659,
Mangli v. Republic (1983) 3 C.L.R. 52,
California Copper Syndicate (Limited and Reduced) v. Harris (Surveyor of Taxes) 5 T.C. 159,Cayzer, Irvine & Co. Ltd. v. Commissioners of Inland Revenue, 24 T.C. 491.
Recourse.
Recourse against the income tax assessments for the years 1979, 1981 and 1982 and special contribution assessments for the quarters 2/79 and 3/82 raised on applicants.
A. Panayiotou, for the Applicants.
Y. Lazarou, Counsel of the Republic B, for the Respondents.
Cur.adv. vult.
STYLIANIDES, J. read the following judgment. By means of this recourse the applicants challenge the validity of the decision of the Respondent No. 1 (the "Respondent") on their objection the income tax assessments 1979, 1981 and 1982 and special contribution assessments for the quarters 2/79 and 3/82.
The salient facts of this case are as follows:-
The applicants - C.D. Hay Properties Ltd. - a private company of limited liability, was incorporated on 18th January, 1973. The shares thereof were held by C.D. Hay & Son Ltd. (49.999 shares) and DOMS Holdings Ltd. (one share).
The applicants submitted audited accounts and tax computations through their auditors for the year 1979 to 1982, both inclusive.
In May, 1984, the Respondent examined the said accounts and computations and, subject to minor adjustments, he decided to accept them. On 29th May, 1984, he informed applicants accordingly and issued assessments for the same years.
In June, 1984, the Respondent reconsidered the transactions in land by the applicants. The profit realized from the sale, due to financial difficulties, on 1st September, 1981, at £180,000.-, of four building sites in Limassol purchased in 1973 and garage and shops built thereon at a total cost of £120,000.-, was treated asa capital gain and not liable to income tax.
The gain from the sales of:-
(a) a building site. Registration No. 2938, at Kato Paphos, purchased in 1973 at £1,800.- and sold in 1979 at £5,500.-; and
(b) a shop, Registration No. 3791, Kato Paphos, purchased on 30th August, 1978, at £8,800.-, registered in the name of the applicants in 1981, and sold on 18th September, 1982, at £21,000.-
was liable to income tax and special contribution, as the transactions were in the nature of trade.
The Respondent thereupon revised the computation of 29th May, 1984, by adding thereon a profit of £3,610.- in 1979 and £12,200.- in 1982. Similar adjustments were made in the special contribution computations. These were communicated to the applicants, as well as to their auditors, by letter dated 16th January, 1985, and the consequential revised assessments were sent on 23rd January, 1985.
The applicants through their auditors on 14th February, 1985,objected thereto, claiming that the transactions in question were not in the nature of trade and, therefore, not taxable for income tax or special contribution purposes, as the disposals in question took place merely as means of financing the acquisition of other more appropriate fixed assets.
The Respondent, under section 20(5) of the Assessment and Collection of Taxes Laws 1978-1979, determined the objection by maintaining his previous decision that the profit from the sale of the site and the shop, both at Kato Paphos, was liable to income tax and special contribution. On 8th April, 1985, by letter, he communicated this decision and the reasons thereof to the applicants; final notices of tax payable of even date were issued and sent to the taxpayer.
Hence this recourse.
The issue that falls for determination is whether in the present case the two transactions were rightly treated in the nature of trade within the meaning of sub-section (1)(a) of section 5 of the Income Tax Laws 1961-1981, which reads:-
"5. - (1) Tax shall, subject to the provisions of this Law, be payable at the rate or rates specified hereafter for each year of assessment upon the income of any person accruing in, derived from, or received in the Republic in respect of-
(a) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried on or exercised;"
The word "trade" shall include every manufacture or adventure or concern in the nature of trade - (section 5(2)(f)).
Whether or not in a particular case trade has been carried on is a question of mixed law and fact; this question has to be resolved on each occasion by the application of the Law to the facts and circumstances of each particular case. (See, Savvas M. Agrotis, Ltd., v.The Commissioner of Income Tax and Limassol Land Investments Ltd. v. The Commissioner of Income Tax, 22 C.L.R. 27, at p. 30; Yiannakis S. Droussiotis v. Republic (Minister of Finance and Another) (1967) 3 C.L.R. 15; Philippou v. Republic (1983) 3 C.L.R. 1836; RaIlisMakrides v. Republic (Minister of Finance) (1967) 3 C.L.R. 147; HadjiEraclis and Another v. Republic (1984) 3 C.L.R. 604; ApostolosIgnatiou and Another v. The Republic of Cyprus, through The Commissioner of Income Tax (1989) 3 C.L.R. 346).
In Halsbury's Laws of England, 4th Edition, Volume 23, p. 142, paragraph 212, we read:-
"In disputed cases the appropriate commissioners, on appeal to them, decide whether there is a trade, but the question what are the characteristics of an adventure in the nature of trade is a question of law. If the commissioners direct themselves rightly on the law, their decision on the evidence before them whether there is or is not a trade is an inferenceof fact with which an appellate court will not interfere, but if it appears to the court that the decision could not reasonably have been reached if there had been proper direction in law, the court may proceed on the footing that there has been a misconception of law."
In Edwards (Inspector of Taxes) v. Bairstow and Another [1955] 3 All E.R. 48, Viscount Simonds said at p. 54:-
"To say that a transaction is, or is not, an adventure in the nature of trade is to say that it has, or has not, the characteristics which distinguish such an adventure. But it is a question of law, not of fact, what are those characteristics, or in order worth, what the statutory language means. It follows that the inference can only be regarded as an inference of fact if it is assumed that the tribunal which makes it is rightly directed in law what the characteristics are and that, I think, is the assumption that is made. It is a question of law what is murder; a jury finding as a fact that murder has been committed has been directed on the law and acts under that direction."
The Court does not interfere with sub judice decisions of the Respondent if it is of the opinion that such decisions were reasonably and properly open to him on the basis of the correct facts and in the light of the correct application of the relevant legislation and principles of law. (See, Georghiades v. Republic (1982.) 3 C.L.R. 659; Mangli v. Republic (1983) 3 C.L.R. 52; and HadjiEraclis and Another v. Republic (supra).)
The burden lies on the applicants to satisfy the Court that the sub judice decision was faulty or it could not be reasonably taken.
The test is whether the transaction exhibits features which give it the character of a business deal.
In California Copper Syndicate (limited and Reduced) v. Harris (Surveyor of Taxas), 5 T. C. 159, Lord Justice Clerk said at pp. 165-166:-
"It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for Income Tax.
What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit- making?"
In the present case the applicants contend that they purchased in 1973 the building site at Paphos with intent to erect premises to house the business of the company and the business of the sister companies with which there is close association. That due to financial difficulties and the bitter experienced of their Limassol enterprise, they did not build; it is however Significant that no drawings or plans were prepared and they endeavoured to explain this by saying that they required more extensive adjacent land for their purposes, which they did not manage to acquire. The building site was sold to meet the purchase price of the shop purchased. With regard to the shop it was purchased on 10th July, 1978 at £8,800.-. Hotel Tours Limited, a sister company in the tourist business and the hire of Z cars, used it. New shops were built in Kato Paphos close to the hotels. This shop was sold in September, 1982, at £21,000.-,in order to purchase a new shop in the area of the hotels. The object of both purchases and sales was not trade or profit but the needs of the sister companies and the finance of the acquisition of new premises.
The reasoning of the sub judice decision was given by the Respondent in his letter of 8th April, 1985, as follows:-
"2. The company's main scope and business inter alia is that of purchase and sale of immovables. (Memorandum and Articles of Association, paragraph 3).
3. The company cannot buy and sell immovables with the reasoning that they were not suitable for their purpose and had to sell them.
4. The period between purchase and sale is short.
5. Because of the great speculation in land the company found a quick and easy way of making a profit, thus constituting trading in land.
6. There is a motive of profit making.
7. Purchases were made by instalments.
8. The purchases were made in greatly speculative areas at Paphos."
It is uncontested fact that the object of the company as set out in the Memorandum of Association (see Exhibit 1) is:-
"3. (a) Να αποκτά διά δωρεάς, αγοράς, ανταλλαγής ή άλλως πως ακίνητον περιουσίαν οιασδήποτε φύσεως και διατηρή ή πωλή, ενοικιάζη, ενυποθηκεύη ή παντοιοτρόπως συναλλάττηται μετά της τοιαύτης ακινήτου περιουσίας."
("3. (a) To acquire by gift, purchase, exchange or otherwise immovable property of any nature and keep or sell, let, mortgage or deal with such immovable property in every way.")
In Cayzer, Irvine & Co. Ltd. v. Commissioners of Inland Revenue, 24 T.C. 491, at p. 496 it was said:
"Again, there is the case where a company is formed to trade in land and is found to be dealing with its land much as this Company has been found to be dealing with its land. In such a case I think it might be comparatively easy to hold that it was dealing with the land as a trader, since the company itself was formed for that very purpose."
There is no single test of general applicability for the determination of the question whether an activity constitutes trade. The following however are relevant: The character of the land purchased, the state of development and future potential, the manner of the finance of the transaction, the business knowledge of the taxpayer, the length of the ownership, the frequency of the transaction or other transactions, the objects of a company as contained in its Memorandum and Articles of Association. The intention to trade may be gathered from a great variety of facts and circumstances.
Having given due consideration to what was contended by the applicants, the reasons given by the Respondent, and all relevant facts and circumstances, I have reached the conclusion that the sub judice decision was reasonably open to the Respondent and the applicants failed to discharge the burden cast on them.
The recourse fails. It is hereby dismissed.
Let there be no order as at costs.
Recourse dismissed. No order as
to costs.