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ΠΑΓΚΥΠΡΙΟΣ ΔΙΚΗΓΟΡΙΚΟΣ ΣΥΛΛΟΓΟΣ
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(1989) 3A CLR 627
1989 May 30
[SAVVIDES, J.]
IN MATTER OF ARTICLE 146 OF THE CONSTITUTION
THE ADMINISTRATOR OF THE ESTATE OF KRYSTALLIA
PAVLIDES, ANDREAS LOUCAIDES,
Applicant,
v.
THE REPUBLIC OF CYPRUS, THROUGH THE MINISTER OF
FINANCE AND ANOTHER,
Respondents.
(Case No. 67/87)
Taxation-Capital Gains Tax-The capital Gains Tax Law 1980 (Law 52/80), section 9-It empowers the Director to assess the value of a property at the time of its disposition on the basis of its market value in the open market at such time-Director not bound to accept any amount declared between the seller and the purchaser as being the sale price of the property (The sub judice in this case was issued before. the amendment of section 9 of Law 52/80 by Law.)-Adis Ltd v. The Republic (1986) 3 C.L.R. 900-907 has no bearing as regards the ambit of section 9 - In the absence of comparative sales, the Director properly relied on evaluation made in accordance with the residual or development method of valuation-In the circumstances the assessment of the value of the land as at the crucial time was reasonably open to the respondent.
By means of this recourse the applicant, as administrator of a deceased's property, impugns the decision whereby he was assessed to pay capital again tax in respect of a sale of immovable property, part of the estate of the deceased. The dispute concern the value of the land as found by the Director at the time of the sale. In the circumstances of this case as the property consider of a field and there were no comparable sales, the Court found that it was proper for the Director torely on a valuation made on the residual method of valuation. Having reached the conclusion that in accordance with section 9 of Law 52/80 the Director was empowered to assess the market value of the land without being bound by the price declared by the parties to the transaction, the Court dismissed this recourse.
Recourse dismissed. No order as to
costs.
Cases referred to:
Adis Ltd v. Republic (1986) 3 C.L.R. 900,
Republic v. Christofides and Others (1984) 1 C.L.R. 305,
Trustee v. Ministry of Works [1958] 3 W.L.R. 536,
Commissioner of Limassol v. Kirzi (1959-1960) 24 C.L.R. 197,
Moti and Another v. Republic (1968) 1 C.L.R. 102,
Republic v. Mantovani (1975) .1 C.L.R. 232.
Recourse.
Recourse against the assessment of capital gains tax on the estate of the deceased Andreas Loucaides.
Y. Potamitis, for the Applicant.
Gl. Hadjipetrou, Counsel of the Republic B, for the Respondents.
Cur.adv. vult.
SAVVIDES, J. read the following judgment. The applicant is the administrator of the estate of the deceased KrystalliaPavlides, of Limassol, and by the present recourse he challenges the assessment of capital gains tax on the estate of the deceased, which was communicated to the applicant by notice of assessment dated 24th December 1986.
The facts of the case are as follows:-
The deceased KrystalliaPavlides, owned a field under Registration No. G 159, plot 223, at Mesa Yitonia, Limassol, of an extent of nine donums, three evleks and 2,400 sq. feet. By a contract of sale entered into between the applicant as administrator of the estate of the above deceased and VasosAyiomam it is Developers Ltd., on the 14th November, 1983 the applicant agreed to sell and the said buyer agreed to buy the said field for the sum £70,000.-. The contract of sale was deposited with the District Lands Office on the following day.
On the 9th December, 1983, the applicant submitted to the respondent Director of the Department of Inland Revenue (hereinafter to be referred to as "respondent 2") a declaration form for the disposition of property on which he declared that the proceeds of the sale amounted to £70.000.-. He also declared that the value of the property on the 27th June, 1978 was £48,000.- and he deducted from the sale price a sum of £2,218. - as commission agents fees and £118.- as stamp fees. On the basis of the calculations made by the applicant, he submitted that the tax payable for capital gain realized was £3,956.40 which he paid.
On the basis of such declaration respondent 2 made his assessment as follows:
Sale price £70.000,00
Less: Market value on 27.6.1978 £36.500,00
Stamps on sale contract £118,00
£36.618,00
Capital gain 33.382,00
Capital Gains Tax 6.676,40
The applicant accepted the above assessment and paid the difference on the tax payable.
The property was transferred in the name of the purchaser onthe 8th March, 1985. On the declaration form for the transfer of the property, the sale price of the property was declared as being £70,000.- on the date the contract of sale was concluded. The Department of Lands and Surveys did not accept such price as the correct market value of the property for transfer fees purposes and assessed its value at £120,000.-. The transfer fees were paid accordingly and the transfer was effected. On the same day the Department of Lands and Surveys informed respondent 2 accordingly by submitting to him the prescribed form containing particulars of the transaction and of the transfer fees paid.
Upon receipt of the above information by respondent 2, respondent 2 directed the Valuations Section of his Department to prepare a valuation of the market value of the property as on 14th November 1983; Suchvaluation was carried out and the market value of the property was assessed as on the 14th November 1983, as being £120,000.-. The valuation report is before me as annex "C" to the opposition.
As a result of such valuation, respondent 2 revised his previous assessment and made a new on fixing the market value of the property as on the 14th November, 1983 at £120,000.- the capital gain realized at £83,382.- and the Capital Gains Tax payable at £16,676.40 less £6,676.40 already paid .thus, leaving a balance of tax amountingto.£10,000.-as outstanding and due. He communicated- his- assessment to the applicant on the 24th April, 1985.
Applicant objected to the above assessment by letter dated the 25th May, 1985. Respondent 2 rejected the objection and by his letter dated 24th December, 1986, communicated to the applicant his final decision and gave his reasons why he rejected applicant's objection. Following such decision the applicant filed the .present recourse challenging the sub judice decision.
The legal points submitted in support of applicant's prayer for relief as stated in the application are the following:
1. The sub judice decision is contrary to Article 24.2 of the Constitution and the provisions of Law 52/80.
2. It is not based on any authority derived from the law.
3. It was taken in excess and or abuse of powers.
4. It was not reasonably open to the Director of the Department of Inland Revenue to assess such amount.
5. The respondent based his valuation on wrong facts and did not take into consideration the real facts of the case.
6. The respondent did not take into consideration comparative sales of other properties.
7. The imposition of the sub judice tax was made in excess or abuse of power.
8. The valuation of the respondent on which the sum of £120,000.- was based is wrong.
The arguments of counsel for applicants as emanating from his written address, his supplementary addresses and various documents filed may be briefly summarized as follows:
(a) The sub judice assessment violates Article 24.3 of the Constitution in that it imposes retrospective taxation.
(b) The assessment was excessive. According to his submission based on the valuation of applicant's valuer the market value of the property on the date of sate could not be more that 100% of its value as at 27thJune, 1978, which as agreed by both parties v as £36 618.
According to the above allegation the market value of the property is fixed at £73,236, but in his written address counsel submitted that it could not be more than £70.000.-.
(c) The valuation method adopted by the valuer of the respondent in finding the market value of the property was not the safest one in the circumstances and that the safest method was that of the valuer of the applicant.
(d) For purposes of capital gain, under the provisions of thelaw, such gain is the profit realized from the disposition of the property. The subject matter property was sold for £70,000.- and this is the amount realized from the disposition of the property according to the declaration of sale at the time of the transfer. In the present case there is no dispute that the property was sold for £70,000.- and there is no allegation by the respondents of fraud or false entries by the applicant. The provisions of the law, counsel submitted, should be strictly interpreted and in case of any doubt the benefit of such doubt should be given to the taxpayer.
In support of his submission in this respect he sought to rely on the dicta in Adis Ltd. The Republic (1986) 3 C.L.R. 900, 907 that a "Declaration of Transfer is a formal document prescribed by Law and one cannot accept anything inconsistent with its contents".
Counsel for the respondent supported the sub judice decision and submitted that such decision was correctly taken under the relevant provisions of the Capital Gains Tax Law, 1980, and the Assessment and Collection of Taxes Laws 1978 and 1979 and that it does not violate Article 24.2 of the Constitution. He further contended that the valuation of the valuer of the respondents is the correct one and in the circumstances the proper method employed once the comparable sales method could not be utilized due to the absence of comparable sales in the area. He also submitted that the provisions of s. 9(1) of the Capital Gains Tax Law 1980 are clear and unambiguous and that for the purposes of the assessment of the gain realized from a sale the value of the property is its market value at the time of its disposition as correctly found by respondent 2.
In the course of the proceedings and after the exchange of written addresses counsel for applicant abandoned his first ground of law in that the sub judice decision violates Article 24.3 of the Constitution. Therefore, I shall not deal with this issue.
From the material before me it emanates that it is common ground that the value of the subject-matter property on 27th June, 1978, was correctly assessed at £36,500.- to which a sum of £118.- had to be added in respect of stamp fees of the saleagreement. Also that there were no comparable sales of properties in the area and, therefore, the comparable sales method of valuation could not be utilized.
Before embarking on the correctness of the relevant valuations of the valuers of both parties and the respective result reached by each one of them, I shall deal with the contention of counsel for applicant that s.9(1) of the Capital Gains Tax Law was wrongly interpreted and applied by respondent 2 and that the market value of the property is the value it was sold under the contract of sale and stated on the declaration form.
The provisions of s.9 of the Capital Gains Tax Law, 1980 (Law 52 of 1980) are clear and unambiguous. They empower the Director of the Department of Inland Revenue to assess the value of a property at the time of its disposition on the basis of its market value in the open market at such time and he is not bound to accept any amount declared between the seller and the purchaser as being the sale price of the property. If any such restriction is accepted then it would have afforded the opportunity to land dealers, for the purpose of evading taxation, to declare any amount much less than the market value of the property in the open market at the time of the disposition.
s.9 provides as follows:
"9.-(1) Το προϊόν της διαθέσεως ιδιοκτησίας είναι το ποσόν όπερ η τοιαύτη ιδιοκτησία, κατά την γνώμην του Διευθυντού, θα απέφερεν εάν επωλείτο εν τη ελευθέρα αγορά κατά τον χρόνον καθ' όν η ιδιοκτησία διετέθη.
(2) Εάν δεν έχη λάβει χώραν αγορά ή πώλησις, θα λογίζηται ως πληρωθέν ή ληφθέν, αναλόγως της περιπτώσεως, ποσόν ίσον προς το ποσόν όπερ η τοιαύτη ιδιοκτησία, κατά την γνώμην του Διευθυντού θα απέφερεν εάν ηγοράζετο ή επωλείτο, αναλόγως της περιπτώσεως εν τη ελευθέρα αγορά καθ' ον χρόνον επεσυνέβη το γεγονός."
The translation in English is as follows:
("9.-(1) The proceeds from the disposal of property shall be the amount which, in the opinion of the Director, suchproperty might be expected to realize if sold in the open market at the time of the disposal. of such property.
(2) If no purchase or sale has taken place, there shall be deemed to have been paid or received an amount equal to the amount which in the opinion of the Director such property would realize, if bought or sold, as the case may be, in open market at the timeof the occurrence of the event.")
Respondent 2, in the present case, very correctly, in the exercise of his powers under s.9, carried out a valuation to ascertain the market value of the property as provided by subsection (1) of s.9.
The case of Adis Ltd. v. The Republic (supra) on which counsel for applicant sought to reply in support of his argument cannot be of any assistance to the applicant. The dictum on which counsel for applicant based his arguments is in connection with the effect of Declarations of Transfer on subsequent inconsistent allegations of the parties making the Declaration but not restricting in any way the power of the Director of the Department of Inland Revenue, who was not a party to the Declaration, to contest the value declared as not representing the amount that such property would realize if bought or sold as the case may be in the open market. In fact in that case thought the amount of disposition of the property was declared as being £10,000.- the Director of the Department of Inland Revenue did not accept such declaration and fixed the same at £18,000.-and consequently raised an assessment of capital gains tax and his decision was upheld by the Court.
This disposes of the legal point raised under (d) hereinabove.
I shall next deal with the other two legal points (b) and (c) together.
The valuation of the applicant is, as described by his valuer, based on the annual increase in the market value of building sites in the area between 1978 and 1983. According to his calculations .the annual increase in such values during the material period was of an average of 15% per annum. He then treated such average increase as applicable to the subject-matterproperty which was a field and came to conclusion that once the accepted valuation of the property as on 27th June, 1978 was £36,500.- and the annual increase till the 14th November, 1983 was 80.7% the value of the property on 14th November, 1983 was £65,955.- and in consequence lower than the price realized from the sale.
In a report prepared three months later containing his observations on the valuation report prepared on behalf of the respondents, he valued the same property at £76,551.- out of which he deducted £6,241.- for transfer fees and interest. The fact however remains that whereas in his first valuation he assessed the value of the subject-matter property at £65,955.- in his second valuation without any change of circumstances or time, he assessed the value of the same property at £76,551.
The valuation of the respondent on the other hand is based on the residual or development method of valuation. The reason for resorting to such method was because the comparable sales method which is the most appropriate in land acquisition cases and which leaves very narrow margin for any mistake, could not be resorted to as the subject-matter property was a field in an undeveloped nature and there were no comparable sales of similar properties in the area at the material time.
According to the above method the possibility of the development of the land in question into building sites was considered and the property was notionally converted into building sites and then by taking into consideration the comparable sales of building sites and adjusting their value to the number of building sites to which the land in question could be divided subject to any deduction for the construction of roads, interest on loans, commissions to the estate agents for the sale of the sites and the profit and risk involved, the value of the subject-matter land was found to be £130.690.-.(Particulars appear in the valuation report, Appendix "C" to the Opposition). After deducting from such amount the transfer fees which amounted to £9,455- a round figure of £120,000.- was considered tobethereasonable market value of the property at the material time.
The residual or development method of valuation is a wellknown method of valuation when the comparable sales method is not possible. As observed in The Republic v. Christofides and Others (1984) 1 C.L.R. 305 - 308 "This method, thought it has a margin of error due to the various factors that are taken into consideration, it is usually adopted whenever there were no current sales of comparable properties to allow for the employment of the best method - the direct comparison of the sale price of such properties with that of the land acquired".
The residual or development method of valuation was met with approval in a number of cases. In Maori Trustee v. The Ministry of Works [1958] 3 W.L.R. 536 at pp. 542-543 the following extract from the judgment of Gresson, J. was cited with approval:
"In my opinion in this case the land must be valued for what it in fact was on the specified date - a tract of land capable as to some, perhaps all of it, of subdivision into building allotments, and of being sold at some time and over some period in that form. That circumstance would influence a purchaser in his determination of price. In estimating what price a purchaser would be willing to pay recourse may be had to an examination of the estimated gross yield from a subdivision as yet notional only, and the estimated deductions that a purchaser would have to take into account;"
This method was also recognized subject to certain observations as to matters which should be taken into consideration in the Commissioner of Limassol v. MarikaKirzi(1959-1960) 24 C.L.R. 197, in Moti and Another v. The Republic (1968) 1 C.L.R. 102-113 and the Republic v. Mantovani(1975) 1 C.L.R. 232 at p.236.
I consider the valuation report of the respondents as correct and based on one of the recognized methods of valuation whereas on the other hand the valuation of the valuer of the applicant cannot be relied upon in the present case as it is a speculative valuation basically based on the comparison of the subject-matter property, a strip of land, with building sites which are properties of completely different nature and which present no similarity to the subject-matter. The annual increase of thevalue of building sites cannot be used for finding the annual increase of the value of a strip of land. Such method might support an argument in respect of a valuation on the annual increase if the comparison is made between comparable properties and not in the case of comparison of two dissimilar in nature properties.
On the basis of may above finding I have reached the conclusion that it was reasonably open to respondent 2 to find the value of the property as he did and reach the sub judice decision.
In the result the recourse is dismissed and the sub judice decision is affirmed. There will be no order for costs.
Recourse dismissed. No order as
to costs.