clr/1982/1982_3_659.pdf

(2)(b) and 23 of the Taxes (Quantifying and Recovery) Law, 1963 (Law 53/63) as amended by Law 61/ 69. The sub judice decision was taken by the Commissioner on 8.4.1976 after a re-examination of the case on the basis of ajoint statement of facts submitted by Mr. Ionides, a taxation 659 Georghiades v. Republic

(1982)consultant acting for the appellant, in agreement and collaboration with an official of the Income Tax Office In evaluating the facts, the Commissioner attached considerable weight to the successive purchases by the applicant, over a relatively short period of time, of land with a development 5 potential, the manner of finance of these transactions, particularly her inability to meet from existing resources the commitments undertaken thereby, the fact that the property was not expected to yield any income, as well as the association of the applicant with land dealers in making an investment The 10 Commissioner concluded that the asset or chose-in-action represented by the agreement breached by the vendor, resulting in the payment of compensation to the appellant, the purchaser, was a trading asset inthehands of the applicant and consequently the damages received for the loss of the right to acquire it, ]5 should be treated as income received from the alienation or parting with a trading asset The trial Judge held that it was reasonably open to the Commissioner to decide as he did and treat the receipt as a trading one. 20 Counsel for the appellant mainly contended (

1. a)That the involuntary disposiuon of land is not a sale, consequently the proceeds resulting from such alienation of an asset can, under no circumstances, be treated as income attracting tax. 25 (
2. b)That the element of trading is altogether missing in a transaction not involving a voluntary purchase or sale, therefore, the money received by the appellant could, under no conceivable circumstances, be treated as a receipt arising from a trading operation or activity, 30 Held, {after dealing with the principles governing judicial rc\iew of taxation decisions—vide pp. 669-670 post) (J) That the element of compulsion or involuntanness in a disposition isnot conclusive, that ifthe product of the disposition isthe result ofahenation of a trading asset, the receipt constitutes 35 income in the possession of the tax payer liable to tax; that the crucial question does not concern the manner of parting with an asset but the character of the asset, whether of a trading or a capital nature; that not every transaction that yields an advantage, however indirect, constitutes an adventure in the 40 660 3 C.L.R. 5 10 15 20 25 30 Georghtades v. Republic nature of trade; that the test is whether the transaction exhibits features which give it the character of a business deal; that a single transaction rarely attracts income tax; that 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.

(2)That it may properly be assumed that the viability of the investment and the income it is likely to produce in future, is the dominant consideration in the mind of the investor; that, on the other hand, where the land is undeveloped and the purchaser cannot be deemed to look to its income, present or future, as an incentive for entering into the transaction, but to its future potential as an asset, one may discern an intention to trade with it, speculating thereby in the realisation of profit from a sale in future; that also the manner of the finance of the transaction is relevant; that intention to trade a given asset need not be formed at the time of its acquisition; that whether in the particular circumstances of a case a given receipt should be treated as income or capital is a question of fact; that the inescapable inference is that the appellant engaged in a series of investments not designed to change over one capital asset with another, but with a view to exploiting future opportunities that might materialise from the crystallisation of the development potential of the land; that the decision taken by the Commissioner was one reasonably open to him, as the trial Judge held at first instance; and that, therefore, the appeal must be dismissed. (Agrotis Ltd. v. Commissioner of Income Tax. 22 C.L.R. 27 modified to the effect that speculation inland has become an incident of common occurrence-vide pp. 670-671 post). Appeal dismissed. Cases referred to: O'Brien v. Benson's Hosiery Ltd.

(1979)3 All E.R. 652 (H.L.); Sutherland v. The Commissioner of Inland Revenue, 12 T.C. 63; 35 40 The Commissioner of Inland Revenue v. Newcastle Breweries Ltd., 12 T.C. 927; IRC v. Church Commissioners for England [1976] 2 AH E.R. 1037 (H.L.); Yiannakis S. Droussiotis v. Republic

(1967)3 C.L-R. 15; Savvas M. Agrotis Ltd. v. The Commissioner of Income Tax, 22 C.L.R. 27; 661 Georghiades v. Republic

(1982)Mavrommati v. Republic

(1966)3 C.L.R. 143; Kingsfield v. Republic

(1966)3 C.L.R. 45; Christides v. Republic

(1966)3 C.L.R. 732; Hadjiyiannis v. Republic

(1966)3 C.L.R. 338; Pappousv. The Republic

(1966)3 C.L.R. 77; 5 Pavlides v. TheRepublic

(1966)3 C.L.R. 530;

(1967)3 C.L.R. 217; ManufacturersLifeInsurancev. TheRepublic

(1967)3 C.L.R.460; Coito Λ/. Pikis v. 7V Republic

(1965)3 C.L.R. 131 at p. 149; Zamir v. Secretaryof State [1980] 1 All E.R. 768; 10 Clift v. The Republic

(1965)3 C.L.R. 285; Coussoumides v. The Republic

(1966)3 C.L.R. 1; Johnstonv. //eof/i [1970] 1 W.L.R. 1567; Californian CopperSyndicate{Limited and Reduced) v.Harris, 5 T.C. 159; 15 Edwards(H.M. Inspectorof Taxes) v. Bairstow & Harrison, 36 T.C. 207; Tempest Estates Ltd. v. Walmsley, cited in Simon's Taxes, Vol. Bl. 618; Turner v. Last, 42 T.C. 517; 20 Greenberg v. IRC [1971] 3 All E.R. 136 (H.L.); Ransom v. Higgs [1974] 3 All E.R. 949 (H.L.). Appeal. Appeal against thejudgment* of a Judge of the SupiemeCourt of Cyprus (A. Loizou, J.) given on the 8th October, 1980 25 (Revisional Jurisdiction Case No. 186/76) whereby appellant's recourse against the validity of the income tax assessments raised on her for the years of assessment 1971, 1972 and 1974 was dismissed. A. TriantafyHides, for the appellant. 30 A. Evangelou, Senior Counsel of the Republic, for the respondents. Cur. adv. vult. TRIANTAFYFLIDES P.: The judgment of the Court will be delivered by Pikis, J. PIKIS J.: The appeal is directed against a judgment of a Reported in

(1980)3 C.L.R. 525. 662 35 3 C.L.R. Georghiades v. Republic Pikis J. judge of this court, dismissing the appellant's recourse taken against the decision of ihe Commissioner of Income Tax, whereby he imposed tax in respect of the compensation received by the appellant for breach of a contract for the pur5 chase of land, in the years it was received, that is, in 1971,1972 and 1974,dealing the receipt as income arising from the disposition of a trading awet. Tax was levied under the provisions of sub-sections I and 6 of s.5 of the Income Tax Laws 1961 1976, and ss. 3, 13

(2)(b) and 23 of the Taxes (Quantifying and 10 Recovery) Law, 53/63, as amended by Law 61/69. The decision impeached in these proceedings was taken by the commissioner on 8/4/76, after a re-examination of the case on the basis of a joint statement of facts submitted by Mr. Ionides, a taxation consultant acting for the appellant, in agreement and 15 collaboration with Mr. Shammashian of the Income Tax Office. An undertaking to re-examine the case wa> given in the course of the proceedings initiated by Recourse No.399/74, challenging a decision of the Commissioner to the same effect, given earlier in the day. 20 On a re-appraisal of the facts, the Commissioner concluded that the asset or chose-in-action represented by the agreement breached by the vendor, resulting in the payment of compensation to the appellant, the purchaser, was a trading asset in the hands of the applicant and consequently the damages received 25 for the loss of the right to acquire it, should be treated as income received from the alienation or parting with a trading asset. We may appropriately mention that the assignability of a chose-in-action is not a pre-requisitc for the imposition of tax on its alienation. (See, O'Brien v. Benson's Hosiery Ltd.

(1979)30 3 All E.R. 652 (H.L.)). The learned trial judge held, on a review of the assessments. that it was reasonably open to the Commissioner to decide as he did and treat the receipt as a trading one; consequently, he dismissed the recourse. Reference is made in the judgment to 35 the criteria and factors that may guide the taxing authorities in the discharge of their duties, subscribing to the view that there was, in the present case, ample material upon which the Commissioner could conclude that the land purchased by the appellant was meant for trading. 40 In evaluating the facts, the Commissioner attached con663 Pikis J. Georghiades v. Republic

(1982)siderable weight to the successive purchases by the applicant, over a relatively short period of time, of land with a development potential, the manner of finance of these transactions, particularly her inability to meet from existing resources the commitments undertaken thereby, the fact that the property 5 was not expected to yield any income, as well as the association of the applicant with land dealers in making an investment. The judge remained unimpressed by the oral testimony of the applicant before him and tar attempt to play down the effect of the averments ma^.i on her behalf in the action for breach 10 of contract, to the effect that plans were being prepared for the division of the land into building sites, an allegation treated as revelatory of her intentions and designs with regard to the asset under scrutiny. On appeal, it was strenuously argued that there was no room 15 in law, or as a matter of proper interpretation of the facts, for treating the land or chose-in-action in question as a trading asset. However, it must be said that in the course of the address of counsel for the respondents, counsel for the appellant felt constrained to concede that, if the land was, in point of 20 fact, a trading asset, damages received for breach of the contract to acquire it, could be treated ai income in the same way as the proceeds of an outright sale would be treated. The appellant rested her case primarily on a twofold submission, that - 25 (I) The involuntary disposition of land is not a sale, consequently the proceeds resulting from such alienation of an asset can, under no circumstances, be treated as income attracting tax. To our mind, this submission is to a degree contra- 30 dictory to the aforementioned consensus with regard to the alienation of a trading asset. Further, it was made in defiance to the principles established by a scries of English decisions, laying down that the manner of parting with an asset does not change the character of 35 the receipt, the receipt always taking colour from the nature of the asset parted with. (See, inter alia, Sutherland v. 77ie Commissionerof Inland Revenue, 12T.C. 63; The Commissioner of Inland Revenue v. Newcastle Breweries Ltd., 12 T.C. 927). 40 664 3 C.L.R. 5 Georghiades v. Republic Pikis J.

(2)The element of trading is altogether missing in a transaction not involving a voluntary purchase or sale; therefore, the money icccived by the appellant could, under no conceivable circumstances, be treated as a receipt arising from a trading operation or activity. In order to evaluate the soundness of the assessments, and decide upon the correctness of the first instance judgment, it is necessary to make brief reference to the facts of the case, as they emerge from the joint statement of facts submitted to the 10 Commissioner. The appellant made, between the years 1965 and 1970, a number of investments in land, situate on the outskirts of Limassol, that had the following common characteristics: 15 20 (

1. a)The land purchased was not immediately developable but had a distinct development potential in the near or foreseeable future. (
2. b)The investments committed the appellant to heavy financial obligations, far beyond her immediate income or her income in the near or foreseeable future. The investments were in part financed by borrowed capital. At the time of making the investments, the appellant was a nurse in the employment of her husband, an ENT specialist, running a clinic in Limassol, earning an annual income of 25 between £300.- to £550.- between the yeais 1963 and 1967. More analytically, the transactions she entered into, were the following: 30 35 (
3. a)In 1965 she purchased two adjoining plots at Ay. Athanassios for an amount of £250.-. She was unable to raise the outlay at the time of entering into the agreement for the acquisition of the land, and had to invoke the assistance of a fellow nurse for the finance of the purchase. The two plots were sold in 1968 at considerable profit for £1,950.-. The explanation of the appellant for this disposition is that it was a poor investment and, therefore, it was not worth retaining. 665 Pikis J. Georghiades v. Republic

(1982)(

1. b)In 1966 or 1967, she purchased immovable property at Limassol and invested in the family home andher husband's clinic at Limassol from money received from the sale of a building site at Famagusta, amounting to £3,000.-, donated to her by her father 5 by way of dowiy. The Commissioner rightly dis­ regarded the sale and subsequent transactions, taking the view that it amounted to a substitution of an investment. (
2. c)Γη mid 1965 and early 1966, she agreed to purchase 10 two adjoining plots at Ay. Phylaxis notwithstanding her inability to finance the Ay. Athanassios invest­ ment and the fact that she had to rely on borrowed capital for its finance. The two plots were purchased for £6,000.-, payable over a period of three years. 15 In 1967 the vendor signified his intention not to proceed with the sale, defaulting thereby in the dicharge of his contractual obligations. Legal procee­ dings were taken by the appellant for damages for breach of contract, resulting in a settlement of the 20 action in 1970 for £25,000.- damages. Thecompensa­ tion was paid in the years 1971, 1972 and 1974.* It is these receipts thatwere taxed andformed the subject -matter of the present proceedings. The Commissio­ ner was impressed by the fact that, in defining her 25 claim to damages, the appellant averred in her state­ ment of claim that plans were being prepared for the division of the land into building sites. It is permissi­ ble for the Commissioner in evaluating the relevant facts to have regard to such extrinsic evidence that 30 may shed light on thetrue natureand effect of atran­ saction. (sec, IRC v. Church CommissionersforEng­ land [1976] 2 All E.R. 1037 (H.L.)). (
3. d)in 1967, a plot of land was purchased, again on the outskirts of Limassol, at Ay. Phylaxis, from a certain 35 Maria Karapatea for £3,120.—, again payable by instalments, extending over a period of three years. (
4. e)Towards the end of 1968, she purchased jointly with two other persons, land at Polemidhia, becoming 666 3 C.L.R. 5 10 Pikis J. Georghiades v. Republic thereby the ownci of one third of the property. In assessing the income of this investment and its natuic, the Commissioner took into consideration that her co-purchasers were land dealers. This is indeed a relevant consideration, as Triantafyllides, J.( as he then was, pointed out in Yiannakis S. Droussiotis v. The Republic

(1967)3 C.L.R. 15. (f) A year later, on 19.12.1970, the appellant agreed to purchase land at Pyrgos, nine miles outside Limassol, for £17,000.— obviously adding to her financial commitments, making, as one might say, her future dependtnt on the commercial viability of her investments. Inarguing hiscasebefore us,learned counsel for the appellant, 15 ichunded us of the observations of Hallinan C.J., in Savvas M. Agrotis Ltd. v. The Commissioner of Income Tax (Case Stated No. 107, and Limassol Land Investments Ltd. v. The Commissionerof Income Tax (Case Stated No. 106), 22 C.L.R. 27, as to the economic realities of the country. He pointed 20 out in Agrotis case, that Ihe opportunities for investments in Cyprus are, in the absence of a stock exchange, very limited and that real estate plays a dominant part in the economic life of the country, being nearly the only asset in which one may invest. Building upon this statement, counsel for the 25 appellant submitted that the taxing authorities should be very slow to treat the acquisition of land as a trading asset, especially - in a case like the present when an intention to trade could not be gathered from successive sales made by the owner. The position portrayed in Agrotis, supra, about the economic 30 realities of Cyprus, is still sound but not altogether accurate and should be modified in this way. The analysis of the economic conditions of the country made by Hallinan C.J., should be coupled with the following statement: Speculation in land has become an incident of common occurrence. 33 JUDICIAL REVIEW OF TAXATION DECISIONS: The decision of the Commissioner of Income Tax is liable to judicial review by the Supreme Court in the exercise of its revisional jurisdiction under Article 146, a fact signified by 667 Pikis J. Georghiades v. Republic

(1982)the provisions of the law itself. (See, s.21 of the Taxes (Quantifying and Recovery) Law 1963(53/63)(as amended by s.9 of Law 61/69). Taxation decisions have been the subject of review in numerous cases. (See, inter alia, Mavromati v. Republic

(1966)3 C.L.R. 143; Kmgsfieldv. The Republic

(1966)3 C.L.R. 5 45; Christidesv. The Republic

(1966)3C.L.R. 732; Hadjiyiannis v. The Republic

(1966)3 C.L.R. 338; Pappous v. The Republic

(1966)3 C.L.R. 77; Pavlides v. The Republic

(1966)3 C.L.R. 530; Pavlides v. The Republic

(1967)3 C.L.R. 217; Manufacturers Life Insurance v. The Republic

(1967)3 C.L.R. 460). 10 The scope and compass of the jurisdiction under Article 146 is by now firmly established. The review and the inquiry it entails is limited to the validity of the act impeached. Such validity is tested by reference to the powers vested by law in the administration, the manner of their exercise and the factual 15 substratum, paiticulaily its correctness. The revisional jurisdiction of the Supreme Couit is primarily of a corrective character. It is aimed to ensure, in the interest of legality and public good, that the administration functions within the sphere of its authority and always subject to the principles of good 20 administration. The court will not assume administiative responsibilities, a course impermissible under a system of separation of State powers, constitutionally entrenched in Cyprus. Etis appropriate to recall in this respect, the observations of Triantafyllidcs, J., a~> he then was, in Costas M. Pikis 25 v. The Republic

(1965)3 C.L.R. 131, at 149, earmarking the powers of the executive and the judiciary; "After all it must not be lost sight of that it is for the Government to govern and for the Court only to control " Unlike the powers vested in the District Court before inde- 30 pendence to adjudicate upon a taxation assessment by s.43 —Cap. 233—and earlier by virtue of s.39 of Cap. 297 (of the old edition of the Statute Laws of Cyprus), the Supreme Court has no jurisdiction to go into the merits of the taxation and substitute, where necessary, its own decision. The power 35 of the Supreme Court is limited, as indicated, to the scrutiny of the legality of the action, and to ascertain whether the administration has exceeded the outer limits of its powers. Provided they confine their action within the ambit of their power, an organ of publicadministration lemainsthearbiter of thedecision 40 668 3 C.L.R. 5 10 15 20 25 Georghiades v. Republic Pikis J . necessary to give effect to the law; and so long as they make a correct assessment of the factual background and act in accordance with the notions of sound administration, their decision will not be faulted. In the end, the courts must sustain their decision if it was reasonably open to them. The same approach was sanctioned by the House of Lords with regard tothepowersvested inthecourtsin England, to review decisions of an administrative nature. In Zamir v. Secretary of State [1980] 1 All E.R. .768, they decided that the administrative decision of an immigration officer could be impugned only on two grounds: (a) Absence of evidence on which he could reach his decision, and (b) where no reasonable person in the position of the immigration officer could reach the decision taken. The approach of the court to the validity of a taxing decision is no different from its approach in respect of any other administrative decision liable to review under Article 146. Therefore, the learned trial Judge rightly approached the decision, confining his review to ascertaining whether the decision taken by the Commissioner was one reasonably open to him. (Sec, also, Clift v. The Republic

(1965)3 C.L.R. 285. and Christides v. The Republic

(1966)3 C.L.R. 732). The initial burden of establishing that the decision complained of is vulnerable to be set aside, is upon the party propounding its invalidity. (See, Coussoumides v. The Republic

(1966)3 C.L.R. 1). CONSIDERATIONS RELEVANT TO DETERMINING WHETHER A RECEIPT CONSTITUTES INCOME: We have earlier indicated that the clement of compulsion or involuntariness in a disposition is not conclusive. If the 30 product of the disposition is the result of alienation of a trading asset, the receipt constitutes income in the possession of the tax payer liable to tax. We find ourselves in agreement with the submission of learned counsel for the Republic, that the crucial question does not concern the manner of parting with 35 an asset but the character of the asset, whether of a trading or a capital nature. What is sound, with respect, in the submission ofcounsel for theappellant, isthat the taxing authorities cannot, from an involuntary parting with an asset discern exclusively therefrom an intention to trade. 40 The definition of "trade" suggested by counsel for the appel669 Pikis J. Georghiades v. Republic

(1982)Iant, that is, voluntary purchase and voluntary sale, is far from exhaustive and certainly incomplete. The categories of trade, asjudicially observed, are never closed, as it was acknowledged in the case of Ransom v. Higgs [1974] 3 All E.R. 949 (H.L.). "Trade" denotes operations of a commercial character by 5 which the trader provides the customers for reward some kind of goods or services. Not every transaction that yields an advantage, however indirect, constitutes an adventure in the •nature of trade. The Privy Council earmarked the considerations that should gutfe the authorities responsible for taxation 10 in determining whether a single transaction is a trading activity or adventure in the nature of trade. The test is whether the transaction exhibits features which give it the character of a business deal. A single transaction rarely attracts income tax. (See, Greenberg v. IRC [1971] 3 All E.R. 136 (H.L.) ). 15 Intention to trade may be gathered from a grsat variety of facts and circumstances, including those adverted to hcreinbelow: The character of the land purchased its state of development and future potential, as well as the income it yields at the time 20 of purchase or is likely to yield in future, is a most consequential factor. (See, Johnston v. Heath [1970] 1 W.L.R. 1567; Caliornian Copper Syndicate {Limited and Reduced) v. Harris, 5 T.C. 159; Edwards (H.M. Inspector of Taxes) v. Bairstow & Harrison, 36 T.C. 207; Tempest Estates Ltd. v. Walmsley, 25 cited in Simon's Taxes, Vol. Bl. 618; Turner v. Last, 42 T.C. 517). A stable investment may naturally lead to the inference that the investor merely changes one form of investment for another without any intention, on his part, to trade with the land itself. 30 It may properly be assumed that the viability of the investment and the income it is likely to produce in future, is the dominant consideration in the mind of the investor. On the other hand, where the land is undeveloped and the purchaser cannot be deemed to look to its income, present or future, as an incentive 35 for entering into the tiansuction, but to its future potential as an asset, one may discern an intention to trade with it, speculating thereby in the realisation of profit from a sale in future. Also the manner of the finance of the transaction is relevant. An investor who has funds immediately available may be 40 670 3 C.L.R. Georghiades v. Republic Pikis J. assumed to substitute a piece of land for an enhanced bank account as a more durable asset. This cannot be said to be the case where the element of speculation in the transaction ispresent, whereupon one may presume that the investor intends 5 to meet financial commitments incurred for the purchase by the sale of the asset in future. Intention to trade a given asset need not be formed at the time of its acquisition, as the case of Taylor v. Good [1973] 2 All E.R. 785 illustrates. In that case, the tax payer had 10 purchased a house at an auction, intending to use it as a family residence. His wife objected to his plans; subsequently, the investor applied for a planning permission and eventually sold it at a profit. It was said that the proceeds were liable to tax as income. Subject to this, the value of the property 15 should be taken as at the date when he actually formed an intention to trade with it and not at the time of its acquisition. Brief reference has been made to some of the considerations that may appropriately guide the taxing authorities in the discharge of their tasks. Given these principles, the question 20 that must be resolved theieafter is one of fact whether in the particular circumstances of a case a given receipt should be treated as income or capital. The learned trial Judge, in a well reasoned judgment, held, it was reasonably open to the Commissioner to treat the 25 compensation received by the appellant as income. Nothing that has been said before usjustifies a departure from the view taken by the trial Judge. On the contrary, there was plenty • of room for the Commissioner to arrive at the decision he did. On any view of the facts, the inescapable inference is that the 30 appellant engaged in a series of investments not designed to change over one capital asset with another, but with a view to exploiting future opportunities that might materialise from the crystallization of the development potential of the land. In our judgment, the decision taken by the Commissioner 35 was one reasonably open to him, as the trial Judge held at first instance. Therefore, the appeal is dismissed. It is with a degree of reluctance we shall refrain from ordering the appellant to pay costs. Appeal dismissed. No order as 40 to costs. 671