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ΠΑΓΚΥΠΡΙΟΣ ΔΙΚΗΓΟΡΙΚΟΣ ΣΥΛΛΟΓΟΣ
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(1989) 3A CLR 731
1989 June 30
[STYLIANIDES. J.]
IN THE MATTER OF ARTICLE 146 OF THE CONSTITUTION AGROKTINOTROFIKES EPICHIRISIS "ROUSHIAS" LTD.,
Applicants,
v.
THE REPUBLIC OF CYPRUS, THROUGH THE COMMISSIONER
OF INCOME TAX,
Respondents.
(Case No. 6/86)
Taxation-Income tax-Deductions-The assessment and Collection of Taxes Laws, 1978-1979, sections 51 and 59-Ambit of section 51-Power thereunder discretionary - Failure to keep proper books of account.
Taxation-Income Tax-interest-The Assessment and Collection of Taxes Law. 1978 (Law 4/78). as amended by Law 23/78, section 42(2)-Unjustifiable omission-meaning of.
Words and phrases-"Unjustifiable omission" in section 42(2) of the Assessment and Collection of Taxes Law. 1978 (law 4/78) as amended by Law 23/78.
Taxation-Income Tax-Deductions-Onus to satisfy Court that a deduction should have been made is cast on taxpayer.
Constitutional Law -Taxation Constitution. Art. 24.1-Cacts on every person the duty to submit proper returns and keep proper audited accounts as provided in the Income Tax Legislation.
Taxation-Income tax-Taxpayer expected to act in a straightforward manner-Dictum of Lord Tomlin in Inland Revenue Commissionersv. Westminster (Duke) [1936] A.C. page 19 disapproved.
The respondent Commissioner decided to exercise his powers under sections 51 and 59 of the Assessment and Collection of Taxes Laws 1978- 1979 and not to allow deductions in respect of wear and tear allowances and any other allowances claimed for the ears in question in respect of income tax by applicants under section 12 of the Income Tax Laws 1961-1978.
The reasons given for such a decision may be summarised thus:
(a) The Commissioner was not satisfied that applicants were keeping proper books of account. Several cheques had been drawn in favour of their Director RoushiasHadjichristodoulou, but instead of debiting his personal account, the relevant sums were charged in the accounts as purchases.
(b) Similarly purchases were not included in purchases entered in the accounts, an indication the payments were made out of unrecorded sales.
(c) The cash shown in the balance sheet did not tally with the analytical cash book (ταμείο) of the applicants.
(d) The conclusion that no proper books of accounts were kept b the applicant company could be justified by the facts revealed from the examination of the affairs of its Director RoushiasHadjicrhistodoulou. who, although, did not have any other known source of income apart from his salary from the applicant company, he had many deposits in his private hank accounts apart from the acquisition by him and by his daughters (who were, also, Directors of applicant company) of assets acquired at considerable cost paid by funds available out of the applicant's resources.
(e) RoushiasHadjichiistodoulou and the company's accountant were not in a position to explain the aforesaid anomalies.
This case concerns the assessment for income tax and special contributions for the years of assessment 1977 and 1978 (years of income 1976 and 1977, respectively). For the year of income 1976, returns were submitted on 18/12/78, whereas for the year of assessment 1978 (year of income 1977) assessments were raised on 10/10/78. Such assessment wasraised under sections 3 and 13(3) of the Assessment and Collection of Taxes Law, 1978 (Law 4178).
The Commissioner found that there had been an unjustifiable delay in making the assessment and therefore demanded interest as from the 1st December of each of the years of assessment in question.
The Court did not accept the contention by the applicant Government that the Commissioner, in invoking the affairs of his applicant's Director RoushiasHadjichristodoulou, had lifted the veil of incorporation. Though the veil of incorporation of a company can be lifted for the purposes of taxation, this was not the case. In this case the affairs of the Director were taken into consideration, only so far as they were made on behalf and for the Company and in relation to its financial affairs.
In the light of the aforesaid facts and of the principles, which sufficiently appear in the hereinabove Headnotes, the Court decided that the sub judice decision was reasonably open to the respondent.
Recourse dismissed. No order as to
costs.
Case referred to:
P.G.G.Clift v. Republic and Another (1965) 3 C.L.R. 285,
Christides v. Republic (1966) 3 C.L.R. 732,
Makrides v. Republic (Minister of Finance) (1967) 3 C.L.R. 147,
Georghiades v. Republic (1982) 3 C.L.R. 659,
Mangli v. Republic (1983) 3 C.L.R. 52.
HadjiEraclis and Another v. Republic (1984) 3 C.L.R. 604,
Hadjichristodoulou v. Republic (1989) 3 C.L. R. 692,
Georghallides (1958) 23 C.L.R. 249,
Hadjiyianni v. Republic (1966) 3 C.L. R. 338,
Rainbow v. Republic (1984) 3 C.L.R. 846,
Tryfonos v. Republic (1984) 3 CL.R. 884,
Inland Revenue Commissioners v. Westminster (Duke) [1936] A.C. at p. 19,
Inland Revenue Commissioner v. Burmah Oil Co. Ltd. [1982] S.T.C. 30,
Bank of Cyprus (Holdings) v. Republic (1985) 3 C.L.R. 1883,
Michaelidou v. Republic (1985) 3 C.L.R. 1836.
Recourse.
Recourse against the assessment raised on applicants in respect of income tax and special contribution for the years of assessment 1977 and 1978.
M. Pelides, for the Applicants.
A. Evangelou, Senior Counsel of the Republic, for the Respondents.
Cur.adv. vult.
STYLLANIDES, J. read the following judgment. The applicants by this recourse challenge the validity of the decision of the Commissioner of Income Tax (the "Respondent") in relation to applicants' income tax and special contribution for the years of assessment 1977 and 1978.
The applicants are a private company of limited liability, incorporated on the 7th January, 1970. Its authorized share capital at all material times was £50,000.-, divided into 100 shares of £500.- each, but paid up at £200.each. The shares were held by the following persons:
(a)Roushias HadjiChnstodoulou..4 Shares
(b)LoukiaPoyiadji ..33 >>
(C) Alexandria Appiou..33 >>
(d)MariaRoushia..30 >>
The directors of the company were all the shareholders, who are residents of Akaki village, Nicosia.
Applicants derived their income during the material years from farming and animal breeding business carried on at Akaki.
They failed to submit their returns of income and accounts and their income tax liability was under investigation for some years prior to 1976.
On 5th November, 1977, the Respondent issued a Notice of Assessment for the year of assessment 1977 (income 1976) to which objection was made on 25th November, 1977, by the taxpayers accountant, on the sole ground that it was excessive.
The return and accounts for the year 1976 were submitted by applicants' accountant on 18th December, 1978.
On 10th October, 1978, the Respondent issued to applicants a Notice of Assessment for the year of assessment 1978 on an income of £11,000.-, less £2,645.- special contribution payable thereon, i.e. on net income & £8,355.-, on which £3,975.87 tax was payable on or before 1st December, 1978.
In relation to the objection for the year of assessment 1978, disputes arose. Recourse No. 342/80 was filed and ultimately the Respondent accepted to consider the objection of the applicants as made in time and the recourse thereupon was withdrawn.
Applicants failed to submit provisional returns to declare their income for special contribution for any quarter of the year 1977, as provided by Regulation 2 of the Special Contribution (Temporary Provisions) Regulations, 1975.
On 30th December, 1983, the Respondent issued to applicants Notices of Assessment for Special Contribution for the four quarters of the year 1977, showing the income upon which revised assessments were made for the reasons stated inthe accompanying letter, dated 29th December, 1983 - (Appendix E).
Objection was taken by the accountants of the applicants on 19th January, 1984.
Applicants' accounts were examined and investigated in detail and scrutiny was made into the books, documents and hank accounts submitted to the Respondent. Respondent's staff, who were investigating the case of the present applicants and that of the shareholder and director RoushiasHjiChristodoulou, had several meetings with the said director and the company's auditors. Entries in the books of account, deposits and withdrawals from the cash and bank accounts of the company were under examination and explanations were expected to be given.
No agreement was reached.
The Respondent determined the objections under section 20(5) of the Assessment and Collection of Taxes Laws 1978- 1979 and exercised his powers under sections 51 and 59 of the said Laws. He decided thereby not to allow as proper deductions against applicants income the amounts of wear and tear allowances and any other allowance claimed as a deduction under section 12 of the Income Tax Laws 1961 to 1978. This decision was communicated to the applicants by letter, dated 22nd October, 1985.
The final Notices of Assessment for special contribution for the four quarters of 1977 were issued on 14th November, 1985.
Notices of Assessment for income tax were issued on 22nd October, checked and sent on 25th October, 1985.
For the year of assessment 1977 interest on the tax at the rate of 6% as from 1st December, 1977, and interest at 9% on the tax for the year of assessment 1978, as from 1st December, 1978, were demanded and made payable, on the ground that there was a delay in the making of the assessments due to the unjustifiable omission of the taxpayer.
The applicants contended that the sub judice decisions are faulty and invited the Court to annul them on the following grounds:-
1. The Respondent wrongly invoked his power under section 51 of Law 4/78 and exercised his discretion thereunder. He violated the rules of natural justice and failed to assess correctly the factual background; and
2. In relation to the interest, the delay in raising the assessments was due to the Respondent's fault and, therefore, the provisions of section 42(2) are inapplicable in the circumstances and the factual situation of the present case.
It is well settled that a recourse against a decision in tax cases is not treated differently from any other recourse tinder Article 146 of the Constitution. In a recourse against an assessment, the Court would not interfere with the sub judice decision of the Income Tax Authorities, if it is of the opinion that such decision was reasonably and properly open to them on the basis of the correct facts and in the light of the correct application of the relevant legislation and principles of law - (see P.G.G. Clift and The Republic of Cyprus through (a) The Minister of Finance, (b) The Commissioner of Income Tax (1965) 3 C.L.R. 285; Christos Christides and The Republic of Cyprus, through The Director of Inland Revenue Department of the Ministry of Finance (1966) 3 C.L.R. 732; Rallis Makrides v. Republic (Minister of Finance) (1967) 3 C.L.R. 147; Georghiades v. Republic (1982) 3 C.L.R. 659; Mangli v. Republic (1983) 3 C. L.R. 52; HadjiEraclis and Another v. Republic (1984) 3 C.L.R. 604; RoushiasHadjichristodoulou v. The Republic of Cyprus, through the Commissioner of Income Tax (1989) 3 C.L.R. 692).
It should be stated that it is, also, a well established principle of Income Tax Law that, just as in a disputed case the onus to satisfy the Court as to liability to pay tax is on the taxing authority, so, where the taxpayer claims any exemption or deduction from tax, the onus is on him to support such claim for exemption or deduction. This principle is very clearly expressed in the following passage of the Judgement of the Supreme Court in the case of CharisGeorghallides (1958) 23 C.L.R. 249 at p. 256:-
"One dealing with the fiscal legislation should carefully examine first, whether the taxpayer is clearly within the words of the provisions by which he is charged with tax and, secondly, if he claims any exemption or deduction from tax - to which liability is either admitted or established - whether such claim is clearly supported by the relevant provision of the Law. In a disputed case the onus to satisfy the Court as to liability to pay tax is on the Tax Authorities and the onus to support a claim for exemption or deduction allowance is on the taxpayer."
(Andreas Hadjiyianni and The Republic of Cyprus, through the Commissioner of Income Tax (1966) 3 C.L.R. 338.)
Learned counsel for the applicants submitted that the act of the Respondent to invoke his power under section 51 of Law 4/78 was not made to promote the aims of the Law. The Respondent failed to draw the distinction between the acts and omissions of the applicants - a company with a different legal entity - from those of its director RoushiasHadjiChristodoulou. No opportunity was given to the company to check the correctness and findings of the .Respondent with regard to discrepancies in the accounts, bank .accounts, purchases, etc., of the company and, thus, the rule of natural justice - audialterampartem - was violated. They failed to assess correctly the factual background, by failing to take into account that Mr. HadjiChristodoulou is of limited education and is not in a position to keep accurate books. The manner in which the company's books were kept was disregarded They failed to give due regard or accept the explanation of HadjiChristodoulou in relation to the discovered vouchers for expenses, totaling £2,683., which could not be traced in the books and, also, the chequestotalling £3,219.-, which, according to the applicants, were money paid to suppliers who did not accept cheques, as their sales were on cash basis. Finally he submitted that the company was keeping proper books and records.
The complaint is concentrated in substance and effect on the disallowance under section 51 of the deductions, which wereclaimed. The relevant part of the letter of 22nd October, 1985, containing the decision reads:-
"1.Οι λογαριασμοί που υποβάλατε για το έτος 1973 μέχρι 1975 έγιναν δεκτοί.
2. Όσον αφορά τους λογαριασμούς των ετών 1976, και 1977 και την υποβληθείσα ένσταση για το έτος 1976 καθώς και την εκπρόθεσμη ένσταση σας για το έτος 1977 που έγινε δεκτή κατόπιν που αποσύρατε την υπ' αριθμό 342/80 προσφυγή σας, σας πληροφορώ ότι κατόπιν λεπτομερούς εξετάσεως των βιβλίων και αρχείων της εταιρείας σας, διεπιστώθη ότι -
(α) εκδόθησαν αριθμός επιταγών επ' ονόματι του διευθυντή της εταιρείας κου Ρουσιά Χ"Χριστοδούλου και αντί να χρεωθεί ο τρεχούμενος λογαριασμός του κου Χ"Χριστοδούλου, εχρεώθησαν οι Αγορές και δεν υπήρχαν τα σχετικά τιμολόγια αγοράς που να δικαιολογούν την τοιαύτη χρέωση. Τα σχετικά ποσά είναι £1,500 για το έτος 1976 και £1,719 για το έτος 1977.
(β) Στον ισολογισμό της 31.12.76 τα μετρητά στο Ταμείο της εταιρείας ήταν μειωμένα κατά £400 ενώ το ποσό που εμφαίνετο στο Αναλυτικό Ταμείο της εταιρείας κατά την 31.12.76 ήταν κατά £400 πιο ψηλό, γι' αυτό προσετέθη στον υποβληθέντα προσδιορισμό φορολογητέου εισοδήματος το ποσό αυτό.
(γ) Το έτος 1976 και 1977 διεπιστώθη ότι έγιναν αγορές £275 και £2,408 επ' ονόματι της εταιρείας, που δεν καταχωρήθηκαν στους εν λόγω λογαριασμούς. Τούτο υποδηλοί ότι επληρώθησαν από πωλήσεις που δεν καταχωρήθηκαν στους λογαριασμούς.
Έχοντας υπόψη τις ανωτέρω σοβαρές παραλείψεις σας στην τήρηση των λογαριασμών των πιο πάνω ετών καθώς και το μεγάλο παραλειφθέν εισόδημα που προέκυψε κατόπιν της κεφαλαιουχικής εξέτασης του διευθυντή της εταιρείας κου Ρουσιά Χ"Χριστοδούλου, απεφάσισα να μη επιτρέψω τις κεφαλαιουχικές εκπτώσεις που ζητήθηκαν για την εταιρεία για τα έτη αυτά, βάσει του άρθρου 51 των Περί, Βεβαιώσεως και Εισπράξεως Φόρων Νόμων του 1978 έως 1979.
Εν όψει των ανωτέρω, οι λογαριασμοί των ετών 1976 και 1977 τροποποιούνται ως εξής:-
1976 1977
£ £
Φορολογητέο εισόδημα σύμφωνα
με τους υποβληθέντες
προσδιορισμούς 1,213 2,105
Πλέον:- 1. Παραλειφθέν
εισόδημα ως ανωτέρω 1,900 1,719
2. Κεφαλαιουχικές
εκπτώσεις μη
επιτρεπόμενες 5,684 2,435
£8,797 £6,259
Μείον επιπρόσθετη έκτακτη
εισφορά- — 867
Αναθεωρηθέν φορολογητέο
εισόδημα:- £8,797 £5,392
Αποστέλλω φορολογίες κατόπιν ενστάσεως για τα φορολογικά έτη 1977 και 1978 (έτη εισοδήματος 1976 και 1977) καθώς και φορολογίες κατόπιν ενστάσεως για την έκτακτη εισφορά για τις τριμηνίες 1/77 μέχρι 4/77 και εάν θεωρείτε ότι αδικείσθε με την πιο πάνω απόφαση μου, μπορείτε να προσφύγετε στο Ανώτατο Δικαστήριο της Δημοκρατίας μέσα σε 75 μέρες από την ημερομηνία των ειδοποιήσεων."
Section 51 reads:-
"51. Deductions from the amount of the object of the tax allowable under the provisions of the Law whereby the tax is imposed may not be made for the purposes of this Law unless proper accounts, to the satisfaction of the Director, and acomputation showing the assessable object of the tax prepared by an independent practising accountant approved by the Minister of Finance as in section 26, are produced to the Director, and a finding by the Director that any such accounts or computations are unsatisfactory shall not be a ground of objection under the provisions of subsection (2) of section 20."
This section was judicially considered in a number of cases, including Rainbow v. Republic (1984) 3 C.L.R. 846 and Tryfonos v. Republic (1984) 3 C.L.R. 884.
Section 51 of Law 4/78 confers power on the Commissioner Director to reject a claim for deduction, notwithstanding its apparent nature, in the absence of reliable audited accounts. Income tax constitutes one of the main sources of revenue of modern states. The state, in order to function properly, to achieve its objectives and carry out its social duties and responsibilities, depends on the correct assessment and collection of tax. The provision in the Constitution Article 24.1 - that "every person is bound to contribute according to his means towards the public burdens", casts on every person the duty to submit proper returns and keep proper audited accounts as provided in the Income Tax Legislation. If the taxpayer fails to perform his duty, the economic planning and the control which the state has to exercise are adversely affected to the detriment of the society.
The taxpayer is expected to make a full disclosure of his income and assets and keep proper records of his full financial affairs, if his claims for deductions are to be accepted by the Income Tax Authorities. Conduct conducive to tax avoidance is not permissible.
The dictum of Lord Tomlin in Inland Revenue Commissioners v. Westminster (Duke) [1936] A.C. at p. 19, that: "Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be" was adversely commented upon in Inland Revenue Commissioner v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, at p. 32, where Lord Diplock said that every man should conduct his business transactions in a straightforwardway and the Court will not recognize as valid and effective the methods of ordering one's affairs so that the tax be less.
The power conferred on the Director, is discretionary. It must be exercised solely for the purpose of the Law and the exercise of such discretionary power should be reasonable in the circumstances of each particular case.
In the present case the acts and omissions of RoushiasHadjiChristodoulou were taken into consideration, only so far as they were made oil behalf and for the company and in relation to the financial affairs of the Company, I find no merit in the allegation that the basic principle of the separate personality of a registered company was violated. The veil of incorporation may in some cases and especially for purpose of taxation be lifted, but this is not the case (Bank of Cyprus (Holdings) v. Republic (1985) 3 C.L.R. 1883).
In the present case .the Respondent exercised his discretion under section 51 for the following reasons:-
"(a) He was not satisfied that Applicant company was keeping proper books of account for the years 1976 and 1977. In 1976 several cheques representing the sum of £1,500, and also in the year 1977 for the sum of £1,719, were drawn in favour of its director RoushiasHadjiChristodoulou and instead of debiting his personal account by way of drawings the said sums were, charged in the accounts as purchases. These entries had the effect of reducing its income by the respective amounts. Similarly in 1976 and 1977 purchases amounting to £275 and £2,408, respectively, were not included in purchases entered in the company's accounts, indicating that the payments were made out of unrecorded sales. Another falsification effected in the accounts submitted to Respondent was the reduction of the cash existing in the books as at 31.12.1976 by the amount of £400.
(b)That no proper books of accounts were kept by the company is also justified by the facts revealed from the examination of the affairs of its director RoushiasHadjiChristodoulou. Although he did not have any other known source of income apart form the remuneration/salary paid to him by Applicant company, he had many deposits in his private bank accounts apart from the acquisition by him and by his daughters (directors of Applicant company) of assets of considerable cost which were paid by funds available to Mr. RoushiasHjiChristodoulou, out of the income and funds of the company's resources.
(c) Mr. RoushiasHadjiChristodoulou and the company's accountant were not in a position to explain the above anomalies noted in the books of the company and/or the funds available to the company's director."
The Respondent took into consideration rightly Mr. HadjiChristodoulou's secret accounts in view of the fact that there was evidence before the Respondent that certain cheques were drawn in favour of Mr. HjiChristodoulou and, instead of debiting his personal account, these sums were charged in the accounts as purchases. The purported explanation was w holly unsatisfactory. The consideration of the objections and the investigation into this case was protracted and the applicants were given apple opportunities to place their case before the Respondent and give reasonable explanations for the discrepancies in relation to their financial affairs.
In all the circumstances of this case, it was reasonably open to the Respondent to arrive at the sub judice decision; the applicants failed to discharge the burden cast on them to persuade the Court to interfere with the challenged decision.
The decision for the imposition of interest was based on section 42(2) of The Assessment and Collection of Taxes Law, 1978 (Law No. 4/78), as amended by Law 23/78, which reads as, follows:
"42. - (2) Οσάκις η καθυστέρησις εις την διενέργειαν βεβαιώσεως οφείλεται εις αδικαιολόγητον παράλειψιν του φορολογουμένου, καταβάλλεται τόκος προς εννέα τοις εκατόν ετησίως από της πρώτης ημέρας του Δεκεμβρίου, του έτους εις το οποίον αναφέρεται η βεβαίωσις, ανεξαρτήτως του έτους εν τω οποίω όντως εγένετο η τοιαύτη βεβαίωσις."
("42. - (2) Whenever the delay in making an assessment is due to a taxpayers unjustifiable omission, interest at the rate of nine per centum per annum shall be payable from the first day of December of the year to which the assessment relates, irrespective of the year in which such assessment was actually made.")
The proviso to sub-section (2) of section 42 reads:-
"Provided that the interest payable with regard to any year of assessment preceding the year of assessment beginning on the 1st January, 1978, shall be at the rate of six per centum per annum."
I examined this section in Michaelidou v. Republic (1985) 3 C.L.R. 1836 and recently in RoushiasHadjichristodoulou (supra).
The omission must be unjustifiable and it must be the cause of the delay in making an assessment.
The decision of the Respondent states clearly that there was a delay in making the assessment, due to the unjustifiable omission of the applicants. For the year of income 1976, returns were submitted on 18th December, 1978, but Notices of Assessment were issued by the Respondent on 5th November, 1977, under section 13(3) of the Taxes (Quantifying and Recovery) Laws 1963 and 1969. Assessment was raised for the year of assessment 1978, on 10th October, 1978, under sections 3 and 13(3) of the Assessment and Collection of Taxes Law, 1978 (Law No. 4/78). Section 13(3) provides:-
"13. - (3) Where a person has not delivered a return and the Director is of the opinion that such person is liable to pay tax imposed on the object of the tax he may, according to the best of his judgment, determine the object of the tax and assess such person according to the nature and extent of his business:
Provided that such assessment shall not affect any liability otherwise incurred by such person by reason of his refusal, failure, or neglect to deliver a return."
In all the circumstances of the case, as recounted herein above, the sub judice decision in relation to interest was reasonably open to the Respondent.
For the foregoing reasons, this recourse fails. No order as to costs.
Recourse dismissed. No order
as to costs.