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(1984)1984 March 17 [DEMETRIADES, J.] IN THE MATTER OF ARTICLE 146 OF THE CONSTITUTION PETROS DEMETRIOU AND ANOTHER, Applicants, THE REPUBLIC OF CYPRUS, THROUGH
  1. THE MINISTER OF FINANCE,
  2. THE COMMISSIONER OF INCOME TAX, Respondents, {Cases Nos. 390/78, 400/78). Income Tax—Cyprus Telecommunications Authority—Dismissal of employees "for having successfully completed their career" at a time when they had a number of years aheadfor service—Regulations 9
(7)(d)(
(15)of the GeneralRegulationsofPersonnelof the Authority—Compensation paid on account of such dismissal underregulation20
(1)(/) not apayment inrespectof theiremployment but one in respect of the termination of their employment and is compensationfor loss of office—Not liabletoincome tax— Section 8(
  1. g)of the Income Tax Laws, 1961 - 1978. 5 Both applicants were "compulsorily dismissed" from the 10 service of the Cyprus Telecommunications Authority ("the Authority") in accordance with the Authority's General Regulations* of Personnel after they were found that they had "completed their career successfully". Following their dismissal they were paid compensation under the provisions of regulation 15 20(I)(
  2. f)which provides that such compensation cannot exceed the amount of the salary which the officer would have received if he continued his service until the completion of the normal age of his retirement. The respondent Commissioner decided that The relevant provisions are regulation 9(7Xd),
(15)and 20(1X0 which are quoted at pp. 435-437 post. 432 3 C.L.R. 5 10 15 20 25 30 35 Demetriou and Another v. Republic this compensation was taxable and upon a recourse by the applicants against this decision the issue that turned for consideration was whether the lump sum received by each applicant was one falling within the provisions of section 8(g)* of the Income TaxLaws, 1961-1978,i.e. whether it was received byway of retiring gratuity or whether the payment was made to them in respect of their employment, in which case the sum concerned was liable to income tax. Held,that although the Personnel Regulations of the Authority speak about "dismissal of an employee for having successfully completed his career", one cannot lose sight of the fact that both applicants had a number of years ahead for service in the employment of the Authority; that the relevant regulation is headed "Dismissal"; and that had they refused to accept the decision of the Promotion Board, they would, in any event, be dismissed in a couple of years as "stagnant"; that, therefore, the compensation which they received by virtue of the provisions of regulation 20(l)(f) isnot a payment in respect of their employment because they had ceased to hold office, but isone in respect of the termination of their employment and is compensation for loss of office and, therefore, not liable to income tax; accordingly the sub judice decision must be annulled. Sub judice decision annulled. Cases referred to: Coussoumides v. Republic
(1966)3 C.L.R. 1; Chibbett v. Joseph Robinson and Sons, 9 T.C. 48 at pp. 60, 61; Comptroller-General of Inland Revenue v. Knight [1972] 3 W.L.R. 594 at p. 598; Heywood v. Comptroller-Generalof Inland Revenue [1975] A.C. 229; Jennings r. Kinder {Inspector of Taxes). Hochstrasser {Inspector of Taxes) r. Mayes [1958] I All E.R. 369; Hochstrasser {Inspectorof Taxes) v. Mayes [1959] 3All E.R. 817 at p. 821. Recourses. Recourses against the decision of the respondents whereby it was decided that the lump sum received by the applicants * Section 8(g) is quoted at p. 438 post. 433 Demetriou and Another v. Republic
(1984)from their employers, the Cyprus Telecommunications Author­ ity on their retirement is liable to income tax. E. Efstathiou with C. Loizou, for applicant in Case No. 390/78. C. Hadjiloannou, for applicant in Case No.400/78. 5 A. Evangebu,Senior Counsel of the Republic, for the respondents. Cur. adv. vult. DEMETRIADESJ. read thefollowingjudgment. Theissuethat poses for decision inthese two consolidatedrecoursesiswhether 1ϋ the lump sum which was payable to the applicants by their employers, the Cyprus Telecommunications Authority, herein­ after referred to as "the Authority", on their retirement from service for having "successfully completed their career", is liable to income tax, as was decided by the Commissioner of 15 income Tax, hereinafter referred to as "the Commissioner". Both applicants, by their respective recourses, challenge the aforesaid decision of the Commissioner and pray for a decla­ rationthatitis nullandvoid andof noeffect inthatit wastaken in contravention of thebasic provisions of the relevant Law, the 20 Constitution and/or in abuse of power. Theapplicant in Recourse No.390/78bases his complainton the following grounds of law: (
  1. a)The decision of the respondents was based on a mis­ conception of facts and/or on misconcepted criteria. 25 (
  2. b)Thedecision oftherespondentsis theproductofamis­ conceptionastotheLaw and/orof awrong application of the Income Tax legislation in force. (
  3. c)The decision of the respondents was reached in abuse and/or in excess of power. (
  4. d)Generally the decision of the respondents was not at all and/or duly reasoned. The applicant in Recourse No.400/78reliesonthe following grounds of law: (
  5. a)The sum collected by him, subject matter of this re- 35 434 30 3 C.L.R. Demetriou and Another v. Republic Demetriades J. course, "is a sum received by way of retiring gratuity" and as such is excepted from taxation. 5 (
  6. b)The interpretation given by the Commissioner of Inco­ me Tax that the payment of the said sum "is for services and profits of office which aretreatedas deferred emolu­ ments" is erroneous, and (
  7. c)The lump sum payment made to applicant was paid in consideration of therelease of theemployers obligations under the service agreement. 10 Although the duties carried out by the applicants and the amount received by them as lump sum on the termination of their employment were different, I do not propose to deal with them as these facts are immaterial for the outcome of the present cases. 15 Both applicants were "compulsorily dismissed" in accordance with the Authority's General Regulations of Personnel after they were found that they had "completed their career success­ fully." The relevant provisions of the General Regulations of Personnel of the Authority, by virtue of which thetwo applicants were "compulsorily dismissed from service" are regulation 9
(7)(d),
(15)and regulation 20(I)(f), which read:- 20 "ΑΡΘΡΟΝ 9 7. To Συμβούλιον προσωπικού, κρίνον προς προαγωγήν, καταρτίζει πίνακας κατά βαθμόν: 25 30 35 δ) Τών εύδοκίμως περατωσόντων την σταδιοδρομίαντων. Ούχ ήττον ουδείς δύναται νά ττεριληφβη ε(ς τουςπίνακας τούτους έάν δέν συνεπλήρωσε 25ετη ύπηρεσίαν, προκειμένου περί αρρένων Τομεαρχώυ και Ύποτομεαρχών, ή 2θΕτη τοιαύτην, προκειμένου περί θηλέων, ή 20ετη ύπηρεσίαν, προκειμένου περί αρρένων τών διοφόρων άλλων κατηγοριών, και Ι5ετη τοιαύτην προκειμένου ττερϊ θήλεος Προσωπικού. Νοείται ότι αί διατάξεις περί ευδόκιμου άφυπηρετήσεως δι' άπαντος τους βαθμούς τοΰ Προσωτηκοϋ εφαρμόζονται μόνον είς περιπτώσεις αμοιβαίας συγκαταθέσεως ('Αρχής και Υπαλλήλων). 435 Demetriades J. Demetrioa and Another τ. Republic
(1984)15. Οί κριθέντες ώς εύδοκίμως περατώσαντες τήν σταδιοδρομίαν των άπολύοντα' υποχρεωτικώς της υπηρεσίας, σνμφώνως προς τήν εν άρθρω 20 παράγραφος 1 στ.τού παρόντος Κανονισμού διάταξιν. ΑΡΘΡΟΝ 20 1. Το μόνιμον καΐ τακτικόν προσωπικόν άπολύεται:στ. Κατ* έφαρμογήν τηςένάρθρω 9 παράγραφος 15 τοϋ παρόντος Κανονισμού διατάξεως, έάν κριθή ώς εύδοκίμως περάτωσαν τήν σταδιοδρομίαντου. Το ούτως άπολυόμενον προσωπικόν λαμβάνει ώς άπο- 10 ζημίωσιν τόσους μηνιαίους μισθούς (Μισθός=Βασικός και Τιμαριθμικόν Επίδομα) οσα'ιά πραγματικά Ιτη υπηρεσίας του. Είς πάσαν περίπτωσιν οί μηνιαίοι ούτοι μισθοί είναι οι άντιοτοιχούντες είς τήν άνωτάτην μισθολογικήν βαθμίδα της μισθολογικής κλίμακος ήν ήκολούθει το προσωπικόν _ 15 τούτο πρό της απολύσεως του, έν πάση δέ περιπτώσει ή άποζημίωσις αύτη δεν δύναται νά ύπερβαίνη τό ποσόν της μισθοδοσίας τουτήν οποίαν Θά ελάμβανε έάν έσυνέχιζε τήν ϋπηρεσίαν τουμέχρι της συμπληρώσεως τοϋκανονικού διά τήν άφυπηρέτησιν ορίου ηλικίας του". 20 ("REGULATION 9 7. TheBoard of Personnel in considering for promotion prepares grading lists of:
  1. d)Those whohave completed their career successfully. Nevertheless no-one canbeincluded inthese lists if he had 25 not completed 25 years of service, in the caseof male Sec­ tion Head and Sub-Section Heads (Τομεαρχών και Ύποτομεαρχών) or 20 years of service, in the case of females, or20 years service, in the case of males of various other classes, and 15 years service in the case of 30 female Personnel. Provided that the provisions for successful retirement for all classes of Personnel apply only in cases of mutual con­ sent (Authority and Employees). 15. Those found to have successfully completed their 35 436 5 3 C.L.R. Demetriou and Another v. Republic Demetriades J career are dismissed compulsorily from theservice in accor dance with the provision of paragraph 1(
  2. f)of regulation 2» of the present Regulation. REGULATION 20 5 1, The permanent and ordinary personnel is dismissed :(
  3. f)On the application of the provision of paragraph 1 of regulation 9 of the present Regulation if he is found t have successfully completed his career. 10 15 20 25 The personnel so dismissed receives as compensation s many monthly salaries (Salary - Basic and Cost of Livin Allowance) as his exact years of service. Inevery case sue monthly salaries are the corresponding to the highest salar point of the salary scale in which such personnel was place before its dismissal, but in any case such compensatio cannotexceed the amountof the salary which hewould hav received if he continued his service until the completion c the normal age of his retirement.") According to the evidence of Mr. N. Markides, the officer i charge of the Personnel Departmentof the Authority, theappL cant in Recourse No. 390/78 had limited chances of promotio as he was incapaciteated after an accident he had in the cours of his employment and, further, because of his inefficiency inth service. As regards the applicant in Recourse No. 400/78, h stated that though he was recommended by the Promotioi Board for promotion, the Director-General did not agree witl therecommendationandas otheremployees weretobepromote» instead of this applicant, he was included by them in the list ο employees "who had successfully completed their career* Mr. Markides said that before both applicants were include 30 in the list, he approached both of them, informed them of th intention of the Promotions Board and that both applicant agreed to be dismissed as having successfully completed thei career with the Authority. 35 This witness further said that as neither of the two applicant had any prospect of promotion, they would, after a further servi ce of two years, be dismissed as "stagnant". 437 Demetriades J. Demetriou and Another *. Republic
(1984)Theissue that turnsfor decision in thepresent two recourses tswhetherthelumpsumreceived by eachapplicantisonefalling within the provisions of section 8(
  1. g)of the IncomeTax Laws, 1961-1978,i.e.whetheritwasreceived,by way ofretiringgratuity >r whether the payment was made to them in respect of their 5 jmployment,inwhichcasethesumconcernedisliable to income ax. Section 8(
  2. g)reads as follows:"8. There shall be exempted from the tax (
  3. g)any lump sum received by way of retiring gratuity, 10 commutation of pension, death gratuity or as consoli­ dated compensation for death or injuries. Counselfor theapplicantsarguedthatthepaymentmadetothe ipplicants was by way of retiring gratuity, whilstcounselfor the cspondent submitted that it was a payment madein respect of 15 :mp!oyment. Counsel for therespondent,insupport of his argument,relied >n thecase of Coussoumides v. The Republic,
(1966)3C.L.R. 1, η whichTriantafyllides J.,ashethenwas,indelivering hisjudgnent decided thata gratuity paid totheapplicantwas notrecei- 20 /ed by way of retiring gratuity and, therefore, it was taxable. however, thatcasemustbedistinquished from thepresentcases. Coussoumides had been employed by a company as a chemist mder an agreement which containednoprovision at all for any gratuity or bonus payable to him on the determination of his 25 imployment and before theexpiration of thetermof theperiod >fserviceprovided inthesaid agreement,hedecidedtoleavehis ;mployment in order to take up work somewhere else and remested the Managing Director of his employers to release him rom his obUgations under the agreement. The Board of Di- 30 ectorsofhisemployersagreedtoreleasehimfrom hisobligations .nd decided to give him a gratuity for his services with them. In the present cases the applicants, with their consent, were >ut on the. list of employees who had successfully completed heir career, in which case they were, under regulation 20(l)(f) 35 >fthe relevant Regulations,entitledto compensationwhich was 438 3 C.L.R. Demetriou and Another v. Republic Demetriades J. calculated in accordance with the provisions of the said regulation. In the case of Chibbett v. Joseph Robinson&Sons, 9 T.C. 48, in which the same issues that arise in these two recourses were 5 decided, Rowlatt J-, in delivering hisjudgment, had this to say (at pp. 60, 61):- 10 15 20 25 30 35 "I think everybody isagreed, and has been agreed for a long time,that incasesofthis kind the circumstance that the payment in question is a voluntary one does not matter. As Sir Richard Henn Collins said, you must not look at the point of view of the person who pays and see whether heis compellable to pay or not; you have to look at the point of view of the person who receives, to see whether he receives it in respect of his services, if it is a question of an office, and in respect of his trade, if it is a question of trade, and so on. You have to look at his point of view to see whether he receives it in respect of those considerations. That is perfectly true. But when you look at that question from what is described as the point of view of the recipient, that sends you back again, looking, for that purpose, to the point of view of the payer: not from the point of view of compellability or liability, but from the point of view of a person inquiring what is this payment for; and you have to see whether the maker of the payment makes it for the services and the receiver receives it for the services. If it was a payment in respect of the termination of their employment 1 do not think that is taxable. I do not think that is taxable as a profit. It seems to me that a payment to make upfor the cessation for thefuture of annual taxable profits is not itself an annual profit at all. 1 do not know whether it has arisen or been discussed, and perhaps the less 1 say about it the better, but I should not have thought that either damages for wrongful dismissal or a payment in lieu of notice, at any rate if it was for a longish period - I willnol say a payment in lieu of notice.Iwillsaya voluntary payment in respect of breaking an agreement which had some time to run - would be taxable profits. But at any rate it does seem to me that compensation for loss of an employment which need not continue, but which was likely 439 Demetriades J. Demetriou and Another v. Republic
(1984)to continue, isnot an annual profit withinthe scope of the Income Tax at all." The judgment of Rowlatt J., above, was approved by the Privy Council in the case of Comptroller-General ofInland Revenue v. Knight,[1972] 3 W.L.R. 594, the headnote of the 5 report of which reads as follows:"Thetaxpayer wasemployed byacompanyasasurveyoron a service agreement which provided for determination by either party on three months' notice. In November 1965, the board of directors of the company passed a resolution 10 that he bedeclared redundant as from December 1965and be given redundancy pay at the rate of one month's salary for every year's service. Thetaxpayer accepted that. The Comptroller-General of Inland Revenuecontended that the amount of the redundancy payment was a gratuity paid or 15 granted in respect ofhisemployment and therefore assessable to tax as income under section 10(l)(
  1. b)of the Income Tax Ordinance No. 48 of 1947, and made an assessment accordingly. The taxpayer appealed to the Special Commissioners of Income Taxcontending that thepayment was 20 made in consideration of the abrogation of a contract of employment and wasnot taxable. The SpecialCommissioners dismissed the taxpayer's appeal but their decision was reversed bythe High Court ofMalaysia whosedecisionwas affirmed by the Federal Court of Malaysia." 25 The Comptroller-General appealed to the Privy Council against the decision of the Federal Court of Malaysia. The issuesthat thePrivy Councilhad been askedto givetheiradvice on werethe same asthequestionscalled for decisioninthepresent recourses. As section 8(
  2. g)of our Income Tax Laws, 30 section 10
(2)(a) of the Malaysian Income Tax Ordinance No.48 of 1947,on which the Privy Council wascalled upon to decide, expressly referred to "gratuities". Lord Wilberforce in delivering the judgment in theKnight's case, supra, had this to say (at p. 598):35 "The question, under section 10
(2)(a) of the Ordinance, is whetherthemoneywaspaid'inrespectoftheemployment'. If the fact is that it was paid in respect of the loss of the employment, it does not come within the taxing words. 440 3 C.L.R. 5 10 15 20 Demetriou and Another v. Republic Demetriades J. Their Lordships find support for this in the EngUsh case of Chibbett v. Joseph Robinson & Sons [1924] 9 T.C. 48 where a sum of £50,000 was granted by a company in voluntary liquidation to a firm of ship managers as compensation for loss of office. Although there was no specific. agreement or bargain that the payment should be made as consideration for abrogating the employment, the payment was held not to be taxable. This case was later considered in Hunter v. Dewhurst [1932] 16 T.C. 605, and although Lord Macmillan, in the House of Lords, found some of the words used by Rowlatt J. too widely expressed, the actual decision seems not to have been disapproved. Their Lordships consider it a right decision in law. Section 10
(2)(a) certainly refers expressly to gratuities. Butitremainsthecasethat,inordertobetaxable,a gratuity must be paidin respect of theemployment -many gratuities are so paid such as 'tips' and these no doubt are taxable. If the gratuity is not so paid, but is paid in respect of the termination of his employment, it is not taxable." Thejudgment in the Knight's case, supra, was applied by the Privy Council on appeal from the Federal Court of Malaysia, in Heywood v. Comptroller-Generalof Inland Recenue, [1975] A.C.
  1. What is a profit arising from a taxpayer's employment has 25 been clearly defined by Upjohn J. in delivering hisjudgment in the case of Jennings v.Kinder{Inspector of Taxes),Hochstrasser (Inspector of Taxes) v. Mayes, [1958] 1 All E.R.
  2. His dictum that " to be a profit arising from employment, the payment must be made in reference to the service the employee 30 renders by virtue of his office, and it must be something in the nature of a reward for services past, present or future", was cited with approval by Viscount Simonds when the Hochstrasser case, supra, came before the House of Lords (see Hochstrasser (Inspector of Taxes) v. Mayes, [1959] 3 All 35 E.R. 817, 821) despite the fact that His Lordship had reservations as to the use of the word "past". Inthepresent cases,although the Personnel Regulations of the Authority speak about "dismissal of an employee for having 441 Demetriades J. Demetrioo and Another v. Republic
(1984)successfully completed his career", one cannot lose sight of the fact that both applicants had a number of yearsahead for service in the employment of the Authority; that the relevant regulationisheaded "Dismissal", and that had they refused to accept thedecisionofthe Promotion Board,theywould,inanyevent,be 5 dismissed in a couple of years as "stagnant". It is my view, therefore, that the compensation which they received by virtue of the provisions of regulation 20(l)(f) isnot a payment in respect of theiremployment because they had ceased to hold office, but is one in respect of the termination of their 10 employment and iscompensation for lossof office and, therefore, not liable to income tax. In the light of my abovefindings, the subjudice decisions are declared null and void and of no legal effect, but in the circumstances of the cases and, in particular, in view of the novelty of 15 the issues raised in the present recourses, I make no order as to costs. Sub judice decisionsannulled. No order as to costs. 442

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