clr/1980/1980_3_47.pdf

(1)and 13(e) of the Income Tax Laws 1961 /o'l

1. The appellant company, a private company having its registered office in Limassol ( "the company") was incorporated in 1953for the purpose of carrying on the business of investment and it derived its income from rents and dividends received from investments in shares of othercompanies. In assessingthe income tax payable by the company for the year of assessment 1971 the respondent Commissioner refused to treat as allowable deduction the amount of interest paid by the company on a loan incurred for the purchase of shares in a public company. In adopting this course the Commissioner departed from his previous practice, which was to the contrary effect, and acted on the basis of a circular* which he issued on September 10,
2. The The relevant text of thecircular is quoted at p. 51 post. 47 Lanitis & Sons v. Republic

(1980)company challenged the above decision by means of a recourse which was dismissed and hence this appeal. Under section 11

(1)of the Income Tax Laws 1961 to 1976, whichwereinforce at thematerial time,therehadtobededucted for the purpose of ascertaining the chargeable income of the 5 appellant all outgoings and expenses wholly and exclusively incurred by it in the production of its income, and under section 13(e)of the same Laws anydisbursements or expenses not bting money wholly and exclusively laid out or expended for the purpose of acquiring the income should not be treated as an 10 allowed deduction. Held,

(1)that though itisa question of fact in each particular case whether or not the borrowing of money is an incident in the course of carrying on the business of a company, in which case the interest paid thereon is an outgoing incurred for the |5 purpose of earning its income and as such is deductible in ascertaining its chargeable income for the purposes of income tax, thesubjudice decision of the respondent Commissioner was not reached as a result of the consideration of the individual facts pertaining to the particular instance of the borrowing of 20 money by the appellant for the purpose of purchasing shares in a public company, namely the Cyprus Popular Bank Limiled, but because the instructions contained in the aforementioned circular dated September 10, 1969, were treated as an inflexible rule applicable in each and every case of interest paid on money 25 borrowed for the purpose of acquiring shares in a public company.

(2)That such a course of action was contrary to the relevant legislative provisions because these provisions must be properly applied inrespect ofinterestpaid orpayableinrelationto money 30 borrowed for the purchase of shares in a company irrespective of whether or not, in any particular instance, the company concerned is a private or a public one; that, consequently, the sub judice decision of the respondent Commissioner has to be annulled; and that, accordingly, the appeal must be allowed and 35 the matter be considered afresh by the Commissioner. Appeal allowed. Cases referred to: Pikis v. TheRepublic

(1965)3C.L.R. 131at p. 149; Philokyprou v. TheRepublic

(1966)3C.L.R. 327 at p. 336; 40 Karnaou v. The Republic

(1966)3 C.L.R. 757 at p. 764. 48 3 C.L.R. Lanitis & Sons v. Republic Appeal. Appeal from the judgment of a Judge of the Supreme Court of Cyprus (A. Loizou, J.) given on the 15th December, 1973 (Revisional Jurisdiction Case No. 417/71).whereby appellant's 5 recourse, against the refusal of the respondent Commissioner of Income Tax to treat as an allowed deduction from the taxable amount of income of the appellant, in relation to the year of assessment 1971, the interest paid on an amount borrowed by appellant for the purpose of acquiring shares in a public 10 company, was dismissed*^ A. TriantafyHides, for the appellant. A. Evangelou,Counsel of the Republic, for the respondents. Cur. adv._ vult. TRIANTAFYLLIDESP. read the following judgment of the Court. 15 By this appeal the appellant company challenges the decision*of a Judge of this Court by means of which there was dismissed its recourse against the refusal of the respondent Commissioner of Income Tax—who comes under the respondent Minister of Finance—to treat as an allowed deduction from the taxable 20 income of the appellant, in relation to the year of assessment 1971, the interest paid on an amount borrowed by it for the purpose of acquiring shares in a public company. The salient facts of this case, as found by the trial Judge, are briefly as follows: 25 The appellant company is a private company having its registered office in Limassol. It was incorporated in 1953 for the purpose of carrying on the business of investment and it derives its income from rents and dividends received from investments in shares of other companies. It has a share capital of 30 100,000 shares of £1 each. In relation to the year of assessment 1971—year of income 1970—its revenue was £1,224 by way of rents and £13,318 by way of dividends. The appellant submitted audited accounts showing a taxable 35 income of £884; this amount was arrived at after deducting, inter alia,the sum of £8,098.485 mils, which was interest paid to the Cyprus Popular Bank Limited on a current account of the appellant with the said Bank. * Reported in

(1973)3 C.L.R. 667. 49 Triantafyllides P. Lanitis &Sons v. Republic

(1980)The respondent Commissioner decided, however, that a sum of £4,053 represented interest paid by the appellant in 1970 in respect of an amount borrowed for the purpose of purchasing shares of the aforesaid Bank—which is a public company—as an investment and, as a result, the appellant was required to 5 pay £1,722.525 mils income tax over and above what is stated in its relevant return,because the said interest was notan allowed deduction. The decision of the respondent Commissioner on this matter was communicated to the accountants of the appellant by a 10 letter dated April 7, 1971, the material part of which reads as follows :" (α) Δάνεια προς χτήσιν μετοχών Δημοσίων 'Εταιρειών. Οί τόκοι έπ! των έν λόγω δανείων δέν εκπίπτονταιτηςφορο­ λογίας καθ' 6τι δέν θεωρούνται ώς δαπάνη έΐ ολοκλήρου καΐ 15 αποκλειστικώς γενομένη προς κτήσιν τοϋ εισοδήματος. Ώς έκτούτουτο ήμισυτοϋ πληρωθέντωντόκωνθα προστεθη εΐς τον προσδιορισμόν". ("(

1. a)Loans for the purchase of shares in Public Companies. The interest in respect of the said loans is not deductible 20 for purposes of income tax as it is not considered to be an expense wholly and exclusively incurred in the production of such income. Therefore half of the interest paid shall be added to the assessment.") The appellant, through its advocate, objected to the above decision, on April 26, 1971, and on October 4, 1971, the respondent Commissioner addressed a letter to the appellant, the material part of which reads as follows:- 25 "2. Ώς ήδη σας έπληροφόρησα δια της Οπό ήμερομηνίαν 7ης 'Απριλίου, 1971, επιστολής μου (παράγραφος 1(a)) οί τόκοι έπ! τών Δανείων προς κτήσιν μετοχών Δημοσίων Εταιρειών δέν εκπίπτονται τοΰ είσοδήματος, καθ* ότι δέν Θεωρούνται ώς δαπάνη έί. ολοκλήρου καΐ αποκλειστικώς γενομένη προς κτήσιν τοΰεισοδήματος". ( "2. As I have already informed you by my letter dated 35 April 7, 1971 (paragraph 1(a)) the interest on Loans for the purchase of shares in Public Companies is not deductible from income, because it is notconsidered to be an expense, 50 30 3 C.L.R. Lanitis & Sons τ. Republic Trlantafyllides P. wholly and exclusively incurred in the production of the income"). 5 As a result, the appellant filed a recourse under Article 146 against the complained of decision of the respondent Commissioner. It is pertinent to state, at this stage, that on September 10» 1969, the respondent Commissioner sent a circular, No. 115, to all assessors in his Office, with copies to all authorised account­ ants, including the accountants of the appellant, the material 10 parts of which read as follows:"INTEREST 15 20 PAID OR PAYABLE It has been our practice upto now to admit as a deductible expense payments of interest in respect of money borrowed for any purpose, although in accordance with the Law an expense is allowed only if it is incurred wholly and exclusi­ vely in the production of the income. 2. As from the year of assessment 1970 the concessional deduction in respect of payments of interest should be restricted only in respect of money borrowed for any of the purposes mentioned below:(
2. a)" (
3. b)The purchase of shares in a private company, or the lending of money to such company for use in its business where the borrower has a substantial holding in the company; (
4. c)(
5. d)(
6. e)25 30 ". According to section 11

(1)of the Income Tax Laws, 1961 to 1976, which were in force at the material time, there had to be deducted for the purpose of ascertaining the chargeable income of the appellant all outgoings and expenses wholly and exclusi­ vely incurred by it in the production of its income, and under section 13(e) of the same Laws any disbursements or expenses not being money wholly and exclusively laid out or expended for the purpose of acquiring the income should not be treated as an allowed deduction. 51 Triantafyllldes P. Lanitis & Sons v. Republic

(1980)We agree with the learned trial Judge that it is a question of fact in each particular case whether or not the borrowing of money is an incident in the course of carrying on the business of a company, in which casethe interest paid thereon isan outgoingincurred for thepurpose ofearning itsincomeand as such 5 is deductible in ascertaining its chargeable income for the purposes of income tax. Havingexaminedthetotalityofthematerialbeforeuswehave reached the conclusion that the sub judice decision of the respondent Commissioner was not reached as a result of the 10 consideration of the individual facts pertaining to the particular instance of the borrowing of money by the appellant for the purpose of purchasing shares in a public company, namely the Cyprus Popular Bank Limited, but because the instructions contained in the aforementioned circular dated September 10, 15 1969, were treated as an inflexible rule applicable in each and every case of interest paid on money borrowed for the purpose of acquiring shares in a public company. Such a course of action is, in our opinion, contrary to the relevant legislative provisions, to which reference has already 20 been made in this judgment, because these provisions must be properly applied inrespect ofinterest paid orpayablein relation to money borrowed for the purchase of shares in a company irrespective of whether or not, in any particular instance, the company concerned is a private or a public one. 25 Consequently, thesubjudice decision of the respondent Commissioner has to be annulled and this appeal is allowed accordingly on this ground; the respondent has to consider afresh the matter and reach a new duly reasoned decision thereon which ought to be communicated in due course to the appellant. 30 Oncethisappeal hasbeenallowed on theaforesaid groundwe need not, and should not, deal with any other aspects of the matter; so, necessarily, anything stated in the appealed from judgment in relation to such aspects must be treated as being obiter and no longer binding on the parties as resjudicata. 35 We ourselves do not pronounce, at this stage, in thisconnection in any waywhatsoever and weleave all these other aspects of this case entirely open, becauseweought not to anticipate or 52 3 C.L.R. Lanitis & Sons v. Republic Triaotafyllides P. forestall the action to be taken by the respondent Commissioner. As has been pointed out in, inter alia, Pikis v. The Republic,

(1965)3 C.L.R. 131, 149, it must not be lost sight of that it is for the Government to govern and for the Court only to control to the extent necessary, and, so, it is not up to this Court to determine in the first instance matters of administration before Government has itself dealt with such matters on their merits (and, see, also, Philokyprou v. The Republic,

(1966)3 C.L.R. 327, 336,and Karnaouv. TheRepublic,

(1966)3 C.L.R. 757, 764). In the result, this appeal is allowed and the subjudice income tax assessment is annulled, but we do not propose to make any order as to the costs of this appeal or of the trial. Appeal allowed. No order as to costs. 53