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clr/1984/1984_3_1588.pdf

(1984)1984 February 13 [TRiANTAFVLLrDEs, P., L. Loizou, HADJIANASTASSIOU, MALACKTGS, DEMETRIADES, SAVVIDES, JJ.] TNTHE MATTER OF ARTICLE 146OF THE CONSTITUTION PANOS LANITIS AND SONS (INVESTMENTS) LIMITED, Applicants. THE REPUBLIC OF CYPRUS, THROUGH
  1. THE MINISTER OF FINANCE,
  2. THE COMMISSIONER OF INCOME TAX, Respondents. (CaseNo. 14/80). incomeTax—Interest—On money borrowedfor thepurpose ofpurchaseofsharesofapubliccompany—Isnotanallowablededuction fat income tax purposes—Sections 11
(1)and \XcXe)(0 of the beam TaxLaws, 1961-1973. AdministrativePractice—Cannotdefeat ataxliability—Concessionary 5 policy of Interne tax authorities which wasnot consistent with theproperconstruction ana4application of therelevant legislative provisions—After It was discontinued the relevant legislation hadtobeappliedonthe basis oftheparticularfacts ofeach Individualease. 10 ConstitutionalLaw—Equality—Discrimination—Fiscal and taxation matters—Legislative and administrative authoritiesof a State allowedconsiderable latitudein layingdownpolicy in relation to—Existence offactors, which as a matter of taxation policy, appeartoJustify a differentiation as regards the treatment for \5 purposesof deduction from taxableincomeof interest paid in respect of loans incurredfor the purchase of sharesinpublic companies andfor thepurchase of shares inprivate companies. Theapplicants,a privatecompany oflimited liability,challenged assessments of incometax for the years of assessment 1972 20 158S 3 C.L.R. 5 to 15 20 25 30 35 Lanitis v. Republic and 1973 to the extent to which such assessments were based on a decision of the respondent Commissioner of Income Tax not to deduct from thetaxable income ofthe applicants interest whichwas paid in respect of money borrowed bythe applicants fromtheCyprusPopular BankLtd.forthepurposeofpurchasing shares in such bank, which was a public company. Therespondent Commissioner decided*that theloanacquired was considered as capital; and that the interest therefor was anexpenseincurred inrespect ofacquisition ofcapitalandtherefore it was not an expense wholly and exclusively incurred in the production of income. Uptothe 10thSeptember, 1969thepractice ofthe respondent Commissioner was to admit as a deductible expense payments of interest in respect of money borrowed for any purpose, although inaccordance withthe law an expensewasallowed only if it was incurred wholly and exclusively in the production of the income; by virtue of a circular dated the 10th September, 1969 the above concessional deduction was restricted only in respect of money borrowed for the purchase of shares in a private company. Held, it is a well settled principle of income tax law, which has, also, been given statutory effect both here and in England, that no deduction from taxable income is allowable in respect of capital employed or intended to be employed in a trade; and that interest of borrowed money, whichiscapital intended to be employed or is employed in trade, is not allowable as a deduction from taxable income;that, therefore, the subjudice decision of the respondent Commissioner was lawfully and reasonably open to him and once this is so this Court cannot interfere withit (seesections 11
(1)and 13(c)(e)(f) of the Income Tax Laws, 1961-1973). Held, further,
(1)that administrative practice cannot defeat a tax liability; that in the present instance there had existed only a concessionary policy and after it was discontinued the relevant legislation had to be applied on the basis of the particularfactsofeachindividualcase(P.M. TseriotisLtd.v. Republic
(1970)3 C.L.R. 135 at p. 143 distinguished). * Thesubjudice decision isquoted at pp. 1591-1592post. 1589 Lanitis v. Republic
(1984)
(2)That there do existfactors which, as a matter of taxation policy, appear to justify a differentiation as regards the treatment for purposes of deduction from taxable income of interest paid in respect of loans incurred for the purchase, on the one hand, of shares in public companies and for the purchase, on 5 the other hand, of shares inprivatecompanies,inviewofessential differences between public and private companies; and it must be borne in mind that both the legislative and the administrative authorities of a Stateare allowed considerable latitude in laying down policy in relation tofiscaland taxation matters. 10 Application dismissed. Cases referred to: Panos Lanitis andSons(Investments) Ltd. v. The Republic
(1973)3 C.L.R. 667; and on appeal
(1980)3 C.L.R. 47; European Investment TrustCo.Ltd. v. Jackson (H.M. Inspector 15 of Taxes), 18 T.C. 1at p. 11; AscotGasWater HeatersLtd. v.Duff(H.M. InspectorofTaxes), 24 T.C. 171 at pp. 175, 176; Bridgwater v. King (H.M. Inspectorof Taxes), 25 T.C. 385 at p. 386; 20 Pattison(Inspectorof Taxes) v. Marine Midland Ltd. [1982] Ch. 145 at p. 159-167; P.M. Tseriotis Ltd. v. Republic
(1970)3 C.L.R. 135 at p. 143; Antoniades v. Republic
(1979)3 C.L.R. 641; Apostolouand Others v. Republic
(1984)3 C.L.R.
  1. 25 Recourse. Recourse against the income tax assessments raised on applicants for the years 1972 and
  2. A. Triantafyllides, for the applicants. A. EvangeloUy Senior Counsel of the Republic, for the 30 respondents. Cur. adv. vult. 1590 3 C.L.R. Lanitis v. Republic TRIANTAFYLLIDES P. read the following judgment of the Court. The applicants are a private company of limited liability and they challenge assessments of income tax for the years of assessment 1972 and 1973 to the extent to which such 5 assessments were based on a decision of the respondent Commissioner of IncomeTax not to deduct from the taxable income of the applicants interest which was paid in respect of money borrowed by the applicants from the Cyprus Popular Bank Ltd. for the purpose of purchasing shares,in such bank, which 10 is a public company. It is useful to mention, at this stage, that previous litigation regarding the above issue, but in respect of the year of assessment 1971,turned out, eventually, to be inconclusive as regards the issue of whether or not interest paid as aforesaid was to be 15 deducted from the taxable income of the applicants (see Panos Lanitis and Sons (Investments) Limited v. The Republic,
(1973)3 C.L.R. 667, and, on appeal Panos Lanitis and Sons (Investments) Limited v. The Republic,
(1980)3 C.L.R. 47). Thesubjudicedecision istobefound in a letterofthe respon20 dent Commissioner dated the 17th November 1979, which reads as follows: 25 30 35 "I have reconsidered your case and according to the below mentioned facts and reasons, I have decided to raise a fresh assessment for theyear of assessment 1971asprovided under section 21
(3)of the Assessment and Collection of Taxes Laws 1978 to 1979 and further to determine the assessments for the years of assessment 1972 and 1973. (
  1. a)The loan contracted from the Popular Bank was to enable you to find capital to purchase the rights issue of shares in respect of shares of the said bank held by you as investments which are fixed assets. There-. fore the loan acquired is considered as capital. ·. /--*/.,·< (
  2. b)Capital is not.afdeductible expense from your chargeable incomefor income tax purpose and any expense incurred in acquisition of capital is not an allowable deduction as well. (
  3. c)The interest amounting to £4,053, £4,500 and £4,800 claimed in respect of the loan made from the Popular 1591 TricnSafyllides P. Lanitis v. Republic
(1984)Bank for the years 1970, 1971 and 1972 respectively is an expense incurred in respect of acquisition of oapital and therefore it is not an expense wholly and exclusivelyincurred intheproduction ofincome". The situation which hasgivenriseto the present proceedings 5 Oaias about as a result of a circular (No. 115 and dated 10th Siflsmber 1969) which the respondent Commissioner sent toa" ^csfrsaorsinhisoffice, withcopiesloallauthorizedaccountants, including the accountants of the applicants, and the mp^'iai parts of which read as follows: 10 "INTEREST PAID OR PAYABLE Ithasbeenour practiceuptonowtoadmitasadeductible expensepaymentsof interest inrespect of money borrowed for any purpose, although in accordance with the law an expenseis allowed onlyif it isincurred whollyand exclusi- 15 vely in the production of the income. 2. Asfromtheyearof assessment 1970theconcessional deduction in respect of payments of interest should be restricted only in respect of money borrowed for any of the purposes mentioned below:- 20 (
  1. a)(V) 'jfne purchase of shares in a private company, or the lending of moneyto such company for usein itsbusinec" where the borrower has a substantial holding in the company; (
  2. c)(
  3. d)_ (
  4. e)".. It is a weli settled principle of income tax law, which has, 25 also, been t"vftn statutory effect both here and in England, *hat no deduction from taxable income is allowable in respect «£ capital employed or intended to be employed in a trade; and that interest on borrowed money, which iscapital intended to be employed or is employed in trade, is not allowable as a 30 «tejfcsSKE: f ^ n taxable income (see, inter alia, Halsbury's 1592 3 C.L.R. Lanitis v. Republic Triantafyllides P. Laws of England,4th ed., vol. 23,p.211,para. 304, and Simon's Income Tax 1964-1965, vol. 2, pp. 398, 399, para. 620). The above principle was expounded in, inter alia, The Euro­ pean Investment Trust Company, Limited v. Jackson {H.M. 5 Inspector of Taxes), 18. T.C. 1, 11, which was followed and applied in Ascot Gas WaterHeaters Ltd. v. Duff (H.M,Inspector of Taxes), 24 T.C. 171, 175, 176 and Bridgwaterv. King (H.M. Inspector of Taxes), 25 T.C. 385, 388. It is true thatin Simon's Income Tax, supra,thereis expressed 10 the view (at p. 399) that thedecision in TheEuropean Investment Trust case, supra, might not withstand challenge in future, but this forecast does not appear to have turned out to be a correct one because, very recently, in Pattison (Inspector of Taxes) v. Marine Midland Ltd., [1982] Ch. J45, 159-167, The 15 European Investment Trust case was again followed and applied. On the basis of the facts of this case and of the seasoning which is set out in the above quoted letter of the respondent Commissioner, dated 17th November 1979, as well as in the light of the relevant principles of income tax law and of the 20 provisions of our Income Tax Laws, 1961-1973 (particularly sections 11
(1)and 13(c)(e)(f))wefindthatthesubjudice decision of the respondent Commissioner was lawfully and reasonably open to him and once this is so we cannot interfere with it . (see, inter alia, Georghiadesv. The Republic,
(1982)3 C.L.R. 25 659, 667-669). It has been argued by counsel for the applicants that prior to the aforesaid circular No. 115 of 10th September 1969 inter­ est in respect of money borrowed for the purchase of shares in both public and private companies was being treated as a 30 deductible expense and that there had, thus, been established an administrative practice on which the applicants had relied since 1965; and that, consequently, such practics: soyΜ not be altered to the detriment of the applicants. Retiai)"» .f_-y been placed, in this respect, on F.M. Tseriotis Ud. v. Ths 35 Republic,
(1970)3 C.L.R. 135, 143. Thepresentcase is,however, d^&ingiiishatojLf ' " " ^ fat' teriotis case, supra, because there it was held that ΐίν .^ministrative practice,which was found toexist, was ccnsKJiecii\/ϊΐήιώ«pr^ner 1593 Triantafyllides Lanitis v. Republic
(1984)construction and application of the relevant legislative provi­ sions, whereas in the present instance there had existed only a concessionary policy andafter it was discontinued therelevant legislation had to be applied on the basis of the particular facts of each individual case, such as the present one (sec the Panos 5 Lanitis and Sons (Investment) Ltd. case, supra, at p. 52). Moreover, administrative practicecannotdefeat a tax liability (see, inter alia, in this connection, Kyriakopoullos on Greek Administrative Law—Κυριακοπούλου "Διοικητικόν Δίκαιον" —4th ed., vol. A, p. 78). 10 It has, also, been argued by counsel for the applicants that the non-deduction from the taxable income of the applicants of theinterest in question,whiletherecontinuesto bededucted, by way of the existing concessionary practice, interest paid in respect of money borrowed for thepurchaseof shares in private 15 companies, results in discriminatory and unequal treatment of the applicants, contrary to Article 28 of the Constitution. Inourviewtheredoexistfactors which,asamatteroftaxation policy, appear to justify a differentiation as regards the treat­ ment for purposes of deductionfrom taxable incomeof interest 20 paid in respect of loans incurred for the purchase, on the one hand, of shares in public companies and for the purchase, on the other hand, of shares in private companies, in view of essentia] differences between public and private companies; and it must be borne in mind that both the legislative and the 25 administrative authorities of a State are allowed considerable latitude in layingdown policy in relation tofiscaland taxation matters(see,interalia»inthisrespect,Antoniadesv. TheRepublic,
(1979)3 C.L.R. 641 and Apostolou and Others v. The Republic, to be reported in the
(1984)3 C.L.R.)*. 30 In any event,onceit hasbeenfound by us thatin thepresent instancethesubjudice decision of therespondentCommissioner not to deduct from the taxable income of the applicants the interest paid on money borrowed by them for the purpose of purchasing shares in a public company was reasonably open 35 tohim, both infact and in law, the applicants cannotcomplain of being treated in a discriminatory manner because the res• Now reported in
(1984)3 C.L.R. 509. 1594 3 C.L.R. Lanitis v. Republic Triantafyllides P. pondent Commissioner continues to treat more leniently, by way of concession, interest paid in relation to money borrowed for the purchase of shares in private companies. For all the foregoing reasons this recourse fails and has to 5 be dismissed; but in all the circumstances of this case we will not make any order as to its costs. Recourse dismissed. No order as to costs. 1595

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