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ΠΑΓΚΥΠΡΙΟΣ ΔΙΚΗΓΟΡΙΚΟΣ ΣΥΛΛΟΓΟΣ
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(1989) 3A CLR 849
1989 July 31
[SAVVIDES, J.]
IN THE MATTER OF ARTICLE 146 OF THE CONSTITUTION
SPILIOTIS AND KLAPPIS LTD.,
Applicant,
v.
THE REPUBLIC OF CYPRUS, THROUGH THE DIRECTOR OF THE
DEPARTMENT OF INLAND REVENUE,
Respondent.
(Case No. 49/86)
Judicial control - Taxation - Income Tax - Taxability of profits from sale of land - Interference by Court - Principles applicable - The Court does not interfere if the finding was reasonably open to the Director of the Department of Inland Revenue on the evidence before him.
Taxation - Income Tax - Trading in land - Matters to be taken into consideration - Duration of ownership, frequency of similar transactions, situation of property (e.g. within a rapidly developing tourist area), use of the property in question.
The only issue in this recourse is whether it was reasonably open to the respondent to decide that the sale of a flat in 1979 by the applicants was trading in land and, therefore, subject to income tax.
The applicants' position was that they acquired the flat in consideration of carpentry made for the owners of the whole building wherein the flat was situated and that their intention was to use the flat as office accommodation.
However, the evidence before the Commissioner showed that the flat in question was resold next year in 1979, without having been used at all as office accommodation, that in subsequent years similar transactions were entered into by applicants, that the property was situated in a rapidly developing tourist area of Limassol.
In the light of the aforesaid facts the Court held that the sub judice decision was reasonably open to the respondent.
Recourse dismissed. No order as to
costs.
Cases referred to:
Georghiades v. Republic (1982) 3 C.L.R. 659,
Philippou v. Republic (1983) 3 C.L.R. 1386,
HadjiEraclis and Another v. Republic (Commissioner of Income Tax) (1984) 3 C.L.R 604,
Amani Enterprises v. Republic (1985) 3 C.L.R 198,
Turner v. Last [1965] 42 T.C. 517,
Clark v. Follett [1973] 48 T. C. 677,
J. Bolson & Son Ltd. v. Farrelly [1953] 34 T.C. 161,
Pickford v. Quirkc [1927] 13 T.C. 251,
Rellim Ltd. v. Vise [1951] 32 T.C. 254,
Granvilie Building Co. Ltd. v. Oxby (H.M. Inspector of Taxes) 35 T.C. 245.
Recourse.
Recourse against the income tax assesment for 1979 and the special contribution assessment for the last quarter of 1979 raised on applicants.
N Papaettathiou, for the Applicants.
Y. Lazarou, Counsel of the Republic B, for the Respondents.
SAVVIDES, J. read the following judgment. Applicant by the present recourse challenges the income tax assessment for the year of assessment 1979 (year of income 1979) and the special contribution assessment for the quarter ending 31st December, 1979 which were raised and determined by the respondent Director of Inland Revenue.
Applicant is a private company of limited liability incorporated in Cyprus on the 23rd February, 1978. The authorized share capital of applicant company at all material times was 50,000 shares of £1 each and its issued and paid up share capital was 32,000 shares of £1 each held equally by Mr. Aristos Spiliotis and Demetris Klappis of Limassol who are also its directors. Applicant company derived its income at all material times from a business of carpentry and furniture manufacturing.
The main issue raised by this recourse is the assessment to income tax and special contribution of the profit of £11,000.- realized from the sale of a flat which was acquired in 1978 for £11,000.- and sold on 20th November. 1979 for £23,000.- after deduction of £1,000.- paid by way of commission.
The said flat, part of Omelka Court of Limassol was acquired in 1978 from the developers in consideration of carpentry work. The cost of acquisition was made by performance of carpentry work executed in 1978 for the benefit of the developers amounting to £5,500 during the year 1978 and the balance in 1979 during the time when the building in which the purchased flat was situated was under construction.
On the 30th June, 1979, respondent raised a temporary assessment based on applicant's temporary return showing temporary income for 1979 £3,000.- on which the temporary tax assessed amounted to £750.-.
As applicant failed to submit in time its return and accounts for the year 1979 respondent issued to applicant on 23rd May, 1981 a notice of assessment for the year of assessment. 1979 of an estimated income of £10,000.- against which an objection was made on the 11th June, 1981 by applicant's auditors. Applicant submitted its return of income arid audited accounts for the year 1979 on 7th April, 1982. When the accounts were examined by an assessor it was found by him that the applicant company realized a profit of £11,000.- from the sale of one flat part of Omelka Building which was not shown in its profit and loss account but instead it was transferred directly to its general reserve.
On 12th November, 1985, the respondent Director of the Department of Inland Revenue addressed to applicant a letter by which the applicant was informed about the revision of the computation submitted by it. The contents of such letter read as follows:
"I wish to refer to the accounts for the years 1978 and 1979 which were submitted by your auditors Messrs. Metaxas, Loizides, Syrimis & Co. and to inform you that the computation of your income for the year 1978 has been accepted, but the computation for the year 1979 has been revised as follows:
Income per computation submitted £7,236
Add: Special Contribution 436
Interest paid disallowed 1,000
Profit from sale of flat 11,000
£19,672
Less: Revised amount of Special Contribution 3,386
Adjusted income for the year £16,286
Less: Loss brought forward 7,366
Chargeable income £8,920
On 16th November, 1985, respondent issued to applicant a notice of assessment (Appendix D to the Opposition) showing as net income the amount of £8,920 as appearing in the aforesaid letter of the 12th November, 1985.
As a result applicant filed the present recourse challenging the income tax assessment for the year 1979 and also the special contribution assessment which followed such assessment.
On the 5th February, 1986 (after the date of the filing of the present recourse, but before respondent came to know about it) respondent issued to applicant company a revised notice of assessment for special contribution for the year 1979, which however, was later withdrawn. Also an objection raised by counsel for respondent in his opposition that the recourse against special contribution was premature was at a later stage abandoned by counsel for respondent.
The legal grounds on which the recourse is based are as set out in the application the following:
1. The "profit" from the disposition or sale of one flat of the applicant is not profit or benefit within the meaning of s. 5(1) (a) or 5(1) (h) of the Income Tax Laws and the respondent arbitrarily and acting under a misconception treated it as such.
2. The respondent wrongly interpreted and applied the Income Tax Laws and the Assessment and Collection of Taxes Laws as far as they concern the nature, character and circumstances of the realization of a profit from the disposition of a flat and the taxable condition of the applicant.
3. The respondent failed to take into consideration undisputed and material factors but on the contrary he relied and/or took into consideration factors irrelevant and/or which could not be taken into consideration.
4. The respondent acted under a misconception of fact and/or failed to carry out a proper inquiry on substantial facts concerning the taxable state of applicant and/or matters related to the sale of the flat.
5. The sub judice decision is arbitrary and was taken in abuse and/or excess of power.
6. The sub judice decision lacks due or legal reasoning and
7. The applicant has been treated in a discriminatory and unequal way.
It is the contention of counsel for applicant in his written address that the flat in question was acquired by the applicant to meet its need to set up office accommodation for the company and for this purpose when it undertook the carpentry works at Omelka Court it agreed to buy the flat in question and the purchase price was agreed to be set off against the value of the said carpentry work. It has been contented by counsel for applicant that such bargain was a perfectly legitimate one and could not in any way be considered as a trading activity.
The company's main object, he added, was the carpentry and furniture business and the acquisition of the flat was a necessary prerequisite for the proper organization, management and the accommodation of the of then requirements of the then newly established company. The sale of the flat in question, counsel submitted was necessitated (a) because it was no more needed as an office accommodation and (b) in order to liquidate an asset so that the necessary funds could be found for the expansion of the workshop and the establishment of a unit comprising both the workshop and the office which had been in process since July. 1979.
Counsel expounded further on his grounds of law set out in the recourse and on the basis of cases decided by the Supreme Court he submitted that the transaction in question was not a trading one in the circumstances and that the decision challenged is vitiated by wrong application of the established principles of administrative and tax law and should be annulled.
Counsel for the respondent on the other hand by his written address submitted that the judice decision concerning the assessment of the income tax was reasonably open to the respondent and set out factors which support the conclusions of the respondent. The factors to which counsel made reference were the following:
(a) The property in question was held by the applicant for a relevantly short period of time (it was acquired in 1978 and sold in 1979).
(b) The transaction under consideration was not the only such transaction engaged in by the applicant. In 1980 the applicant acquired a shop under the same circumstances which was sold in 1985 realizing a profit of £10.000.-. Also in 1986 the applicant sold more property consisting of land and buildings the land having been acquired since 1978 and the buildings erected in subsequent years.
(c) The said property was situated near the sea at Amathus which was and is a rapidly developing tourist area where properties such as the said property were and are in great demand. In support of this he made reference to the case of Georghiades v. The Republic (1982) 3 C.L.R. 659, 670.
(d) The applicant never set tip office in the premises tinder consideration; in fact the fiat was never registered in its name but as it appears the applicant had assigned its rights to the new purchasers in whose name the transfer was effected. This fact, counsel submitted, is a clear indication that the applicant acquired the property with the sole object of turning it over again at a profit and that at no time did it have any intention of using such property. This view, counsel added, is further reinforced by the fact that the property's location rendered it unsuitable as an office as it was some distance away form the applicant's work shop which was in the Omonia area and also from the business community in the town and its related facilities for example banking services suppliers etc.
(e) Finally, counsel submitted that it is common knowledge that most businesses in the building trade connected with building developers in order to be given a special contract agree to receive flats, offices or shops from such developers as part consideration against the value of the work to be carried out by them as sub-contractors and subsequently sell same to recover the cost plus profit for the work represented in the property. This, counsel submitted, as is evident from similar dealings entered into by the applicant as well as from the relatively short period that the properties remain in its possession was part of the ancillary trading activities of the applicant company undertaken for the purpose of promoting its trade.
Counsel for applicant rejected the contention of counsel for respondent that it is a very well sound commercial activity followed by all businesses dealing with building developers to acquire flats or shops in consideration of providing materials and work and submitted that such contention is nothing more than a guesswork leaving aside and entirely ignoring the particular circumstances of the case.
Furthermore by his written address in reply counsel for applicant maintained that the sub judice decision is vitiated with illegality and violates the established principles of Administrative Law in that:
(a) There exists at least probability that the respondent acted under a misconception both of the law applicable and the facts relevant to the case;
(b) the respondent failed to carry out a due inquiry; and
(c) the sub judice decision is based on an erroneous reasoning or lacks due reasoning.
The issue that calls for determination in the present case is whether it was reasonably open to the respondent to treat the profits which the applicant realized form the sale of the flat in question as trading profits and as such taxable under the provisions of the relevant income tax legislation.
The question of taxability of profits arising from the sale of land has been judicially considered by tile Supreme Court in a number of cases (vide Georghiades v. The Republic (1982) 3 C.L.R. 659; Philippou v. The Republic (1983) 3 C.L.R. 1386; HadjiEraclis and Another v. The Commissioner of Income Tax (1984) 3 C.L.R 604; Amani Enterprises v. The Republic (1985) 3 C.L.R 198). The principles emanating from such cases are that tile Court will not interfere with the findings of the Director of the Department of Inland Revenue if such findings were reasonably open to him on the evidence before him.
In Philippou v. The Republic (supra) Triantafyllides, P. (the then President of the Supreme Court) makes a very lucid exposition of the law on the matter with reference to the relevant case law both in England and of our Supreme Court. At P. 1390 we read the following:
"Whether or not in a particular case trade has been carried on is a question of mixed law and fact and there does not exist in this respect a conclusive test of general applicability; and such question has to be resolved on each occasion by the application of the law to the facts and circumstances of each particular case (see, inter alia, in this respect, Agrotis Ltd. v. The Commissioner of Income Tax. 22 C.L.R. 27, 30, Droussiotis v. The Republic (1967) 3 C.L.R. 15, 23, and Vassos Estates Ltd. v. The Republic (1969) 3 C.L.R. 58, 71, 72)."
Therefore, what has to be examined in the present case is whether there was evidence entitling the respondent to reach the conclusion that the profits under consideration were trading receipts and in doing so I shall consider the various factors relied upon by the respondent in reaching his sub judice decision. Such factors, are:
(a) Duration of ownership; (b) Frequency of similar transactions; (c) Situation of the property; (d) The applicant never set up office in the premises in question; (e) The alleged business practice that most businesses in the building trade in order to be given a sub-contract agree to receive flats etc. as part consideration against the value of the work to be done by them as sub- contractors and subsequently sell same to recover the cost plus profit.
I shall deal with the above factors in the order they were presented.
(a) Duration of ownership: The relevance of the duration of a short period of ownership as an indication of trading finds support in a number of English cases.
Thus in Turner v. Last [1965] 42 T.C.5 17 at pp. 522-523 we read the following in the judgment of Cross. J.:
"A man may buy something, whether it be land or a chattel, for his own use and enjoyment with no idea of a quick resale, and then, quite unexpectedly, he may receive an offer to buy which is too tempting to refuse. That is a perfectly possible state of facts; but the fact that there was a quick resale naturally leads one to scrutinise the evidence that it was not envisaged from the first very carefully."
In that case, the profit arising from a transaction in land, where the period between completion of purchase and. contract of sale was less than four months was held to be taxable. (Relevant is also the case of Clark v. Follett [1973].48 T.C.677).
In the present case the property was acquired by the respondent in 1978 to be used as an office form which to run its business, and was sold the following year without the respondent having ever used it as an office.
(b) Frequency of similar transactions: The transaction under consideration was not the only transaction of this nature engaged by the applicant. According to the material in the hand of the respondent the respondent company in 1980.25 acquired a shop under similar circumstances. which it sold in 1985 realizing a profit of £10.000.-. In 1986 the applicant sold more property consisting of land and buildings. These transactions were expressly mentioned by counsel for the respondent in his written address and had not been contested.
Frequency of similar transactions is an important factor in deciding whether or not a trade is carried on.
In J Bolson & Son Ltd Farrell [1953] 34 T C 161 it was held, at p. 167, that-
".....none of them are really any authority for the present case, but are merely a lot of illustrations about what is not and what is an activity in the nature of trade. A deal done once is probably not: though it may be Done three or four. times it usually is.
In Pickford v. Quirke [1927] 13 T.C: 251.at p263 we read:
"Now of course it is very well known that one transaction of buying and selling a thing does not make a man a trader, but if it is repeated and becomes systematic, then he becomes a trader and the profits of the transaction not taxable so long as they remain isolated, become taxable as items in a trade as a whole...".
The number of transactions of a similar nature also played a part in the decision of the Court of Appeal in. Rellim Ltd. v. Vise [1951] 32 T.C. 254. There a company acquired a number of houses garages a farm and 60 acres of land by. Separate purchases in 1939 and 1944. Between 1945 and 1947 the company sold by five separate sales, two of the houses, the 13 acres of land and the farm. It was held that the profits accruing from these transactions were trading profits.
It has been contended by counsel for applicant that: the subject-matter property was shown in the applicant's books as a fixed asset. I agree with the submission of counsel for respondent that this fact is not per se evidence of the company's intention to hold the flat as an investment.
Support .in the latter proposition may be found in Granville Building Co. Ltd. v. Oxby (H.M. Inspector of Taxes) 35 T.C. 245 where notwithstanding' the fact that the property, comprising of houses was shown in the company's accounts as capital. Harman, J. came to the conclusion that the property was part of the company's stock-in-trade.
(c) Situation of Property: The subject property was situated near the sea at Amathus. Within a rapidly developing tourist area where there is a great demand for such properties for tourist purposes.
The situation of the property is an important factor to be taken into consideration in cases of this nature. As observed by Pikis, J. in his judgment in the Full Bench case of Georghiades v. The Republic (1982) 3 C.L.R. 659, 670:
"The character of the land purchased its state of development and future potential as well as the income it yields at the time of purchase or is likely to yield in future, is a most consequential factor."
(d) Use of the property: It is the contention of the applicant that the flat in question was bought by the company to be used as an office from which to run its business. In fact it has never been used as such. The factory of the applicant is situated at Omonia Quarter of Limassol and the flat in question at Amathus. miles away, in a tourist area. From the material in the hands of the respondent the flat in question, though bought by the applicant, was never registered in its name but the applicant assigned its rights to the new purchasers in whose name the transfer was effected.
(e) The alleged business practice: I find it unnecessary to deal with this factor. No evidence has been adduced before me in support of such practice. Irrespective of the soundness of this contention, in the absence of any evidence I cannot treat such factor as evidence in support of respondent's decision.
Bearing in mind all the factors enumerated above, with the exception of factor (e) which I have discarded, I have come to the conclusion that on the evidence before him, the decision taken by the respondent Director of the Department of Inland Revenue was one reasonably open to him.
I reject the contentions of counsel for applicant that there was lack of due inquiry in this case or that the reasoning of the sub judice decision is erroneous.
In the result this recourse fails and is hereby dismissed. I make no order for costs.
Recourse dismissed. No order as
to costs.