(1984)1984 June 15 [STYLIANIDES, J.] IN THE MATTER OF ARTICLE 146 OF THE CONSTITUTION GEORGHIOS X. HJIERACLIS, Applicant, v. THE COMMISSIONER OF INCOME TAX, Respondent. (Case No. 169/83). NICOLAS HJIERACLEOUS, Applicant, v. THE COMMISSIONER OF INCOME TAX, Respondent. (Case No. 402/83). Income tax—"Artificial or fictitious" transaction—Transaction in the nature of trade—Sole transaction—Sections 36
(1)and 5
(1)(
- a)and 2(
- f)of the Assessment and Collection of Taxes Laws. 1978-1979—Purchase of land—Negotiated by applicants who were brothers and building contractors—And one of them paid 5 by cheque the down payment—Mother the purchaser under the contract—Land transferred in her name but on the same day she transfered it by way of gift to the two applicants and resold by them at a considerable profit—Mother 80 years old and having no money or income—Seller stating that negotiations and trans· 10 actions relevant to the salemade by the applicants—Land situated in an area where prices of land are galloping—Applicants in a position to know of speculative land dealings in the area—Reasonably open to the respondent Commissioner to conclude that the transaction wasafictitiousone—And that thoughasoletransaction 15 604 3 C.L.R. HJiEradle andAnother v.Republic wasnotfor investment purposes butfor trading purposes—And thedifference between thepurchaseprice andthesale price was income liable to tax—Inquiry thatledtosubJudicedecision not in any wayfaulty, 5 Incometax—Primary facts not In dispute—It isfor the respondent Commissioner to drawinferencesfrom theprimaryfacts—Principleson which Courtwillinterfere withsuch inferences. Two plots of land in the vicinity of Paralimni, the purchase ofwhichwasnegotiated bytheapplicants,brothers and building contractors by occupation, were, by contracts of sale entered into between the vendor and the mother of the applicants, purchased onthefacoofthecontractsbythemotheroftheapplicants. One of them paid by cheque the down-payment. The two plots were transferred by a declaration of sale in the name of the mother who, instantly and on the same day, transferred thembywayofgift tothetwoapplicantswho,ina shortperiod, resold them at a considerable profit. 10 15 Therespondent Commissioner in exercise ofhispowers under section 36
(1)* of the Assessment and Collection of TaxesLaws, 1978-1979 decided that: 20 (
- a)The transaction of the purchase bythe mother and the gift to the applicants was afictitiousone and that the applicants actually purchased the properties directly from the seller; and 25 (
- b)The sale by them was an act in the nature of trade** and, therefore, the difference between the purchase price and the sale price was income liable to tax. Hence these recourses in which Counsel for the applicants mainly contended: 30 (
- a)That the decision that the transaction was a fictitious one was faulty as it was reached after insufficient inquiry; and, * Section 36
(1)provides that "Where the Director is of theopinion that in respect ofanyyearof assessmenttheobjectof thetaxofanypersonisreduced by any transaction which in his opinion was artificial or fictitious, he may disregardanysuchtransa<ton andassessthepersonsconcerned ontheproper object of the tax". ** This decision was taken under section 5(1Xa) and 2(0 of the Law which is quoted at p. 612 post. 605 HjiEractis and Another \. Republic (19?4) (
- b)That the transaction of the sale by. the.applicants was not.trade, and, thercforc.no income,liable lo tax was derived. In the course:of therinvestigation by the respondent the.applicantswere asked about the. financial position of their mother; 5 and'they said.that she.was an old woman of 80 andthat.she had no money or any income: They, also, said that they did not know how their- mother-acquired, the. lands- or what she was doing. They simply knew that she gifted to them the.two plots of" land. The. seller signed a responsible-statement in which !0 he.stated*that;the-negotiations and::transaction relevant to the: sale, ofΓthe said plots were made by- the.applicants, never by their.mother, though the name.of the mother appeared.in thecontract: of sale: as- the. purchaser. Held, (I) that having, regard,to all the.circumstances of'this 15. case, including,.inter.alia, the.agexof the mother, the undisputed. statements-of"the applicants, the. statement of the seller; the. payment by:cheques by one of the applicants and the circum stances of the two transfers on the same day, the inquiry was not.in any way faulty; that a.proper inquiry under the circum- 20 stances-was carried out-and. that - the interview of the-mother would serve no useful purposc.in the-process of theiexamination of'the-case; that the,primary facts-were-not" in-dispute; that it was-thenrfor thei-Commissioncrtodraw the inferences from-the primary, facts; that this..Court will interfere-with- the -inference 25' of fact.only in~a case.-where-it is insupportableon.-the basis of thetprimary facts so found after-due inquiry.; that the.decision reached by-the:respondent was not only reasonablyopen to him butritvwas-alsounassailable; that.therefore; the;transactioniwas> a-, fictitious one; arid:the motherwas~used..as a.tool in a. pre- 30 ordained series of transactions to mask the.fact.that the.actual purchasers of the. two plots, werei the. applicants, themselves; accordingly contention (
- a)must- fail.
(2)That since:in.the present case the-applicants are: building: contractors of Paralimni, an area where, the price of land-is 35" galloping-due to.aivoutburst.of touristic^developmcnt; that since they were: inra: position; to-know, of- speculative land, dealings in the.area; that since^theJand-.was purchascdnmainly.on credit; and-'was~land· that-acquired a^developme:U value: that since. they-resold the.property a few months aftorthc completion:of 40 606 3 C.L.R. 5 10 HjiEraclis and Another v. Republic their purchase at a price more than double the price at which theyhad acquired it; that sinceintheprocessofacquisition they applied a scheme offictitioustransaction, that is to say, they used their mother as a tool so as to appear that the property in question, purchased by them was gifted to them by their mother, the purchase was not for investment but for trading purposes though it was a sole transaction by these applicants; that, therefore, on the totality of the circumstances of the case theonlyreasonableconclusion tobedrawn wasthe one reached bytherespondentCommissionerandtherewasnothingjustifying this Court to interfere with it; accordingly the recourses must fail. Applications dismissed. Cases referred to: 15" Mangli v. Republic
(1983)3 C.L.R. 52; Furniss (Inspector of Taxes)v. Dawson [1984] 5 T.C. 153-167; AgrotisLtd. v. Commissioner of IncomeTax,"22C.L.R. 27 at p. 30; Jonesv. Leemingy 99 L.J.K.B. 318 at p. 322; 20 Barry(Inspector of Taxes)v. Cordy[1946] 2 AH E.R. 396; Edwards (Inspector of Taxes)v. Bairstow and Harrison [1955] 3 All E.R. 48 at p. 54; Californian CopperSyndicate (LimitedandReduced) v. Harris 5 T.C. 159 at pp. 165-166; 25 Greenberg v. I.R.C. [1971] 3 All E.R. 136; Makrides v. Republic
(1967)3 C.L.R. 147; Droushiotis v. Republic
(1967)3 C.L.R.
- Recourses. Recourses against the income tax assessments raised on. 30 applicants in lespect of the years 1973-
- A. Poetis, for the applicants. M. Photiou, for the respondent. Cur. adv.vult*. 607 HjiEraclis and Another τ. Republic
(1984)STYLIANIDES J. read the following judgment. By these re courses the applicants challenge the validity of the decisions of the respondent, the Commissioner of Income Tax (under the the Income Tax Law he is "the Commissioner of Income Tax" and under the Assessment and Collection of Taxes Law "the 5 Director of Inland Revenue"),in determining their objections against the income tax assessments in respect of the years 197379 dated 8th March, 1983, and 9th August, 1983, respectively. Two plots of land in the vicinity of Paralimni,the purchase of which was negotiated by theapplicants, brothers and building 10 contractors by occupation, were by contracts of sale entered into between the vendor and the mother of the applicants purchased on the face of the contracts by the mother of the applicants. One of them paid by cheque the down-payment. The two plots were transferred by a declaration of sale in the 15 name of the mother who, instantly and on the same day, trans ferred them by way of gift to the two applicants who, in a short period, resold them at a considerable profit. The respondent decided that— (
- a)The transaction of the purchase by the mother and the 20 gift to the applicants was a fictitious one and that the applicants actually purchased the properties directly from the seller; and, (
- b)The sale by them was an act in the nature of trade and, therefore, the difference between the purchase price and the sale price was income liable to tax. 25 The recourses are directed against this dec'ston. These cases were taken together as they raise common points and the issues arose out of the same transaction. The aforesaid decisions are challenged on two grounds:- 30 (
- a)The decision that the transaction was a fictitious one is faulty as it was reached after insufficient inquiry; and, (
- b)The transaction of the sale by the applicants is not trade and, therefore, no income liable to tax was derived. The sequence of events runs as follows:608 35 3 C.L.R. 5 Ηjiuracils and Another v. Repulic Stylianides J. The applicants are brothers, building contractors of Paralimni village. In January, 1980, when the income tax affairs of the applicant in Application No. 402/83 were' being examined, it was revealed that the applicants sold and transferred Plot No. 180, Sheet/Plan 33/64, in thearea of Paralimnivillage,2donums and 2 evleks in extent, at £8,200- on 25th January, 1979, and Plot No. 182 of the same Sheet/Plan, 4 donums and 2 evleks in extent, to another purchaser for £18,000.- on 3rd May, 1979 A further examination brought out that by the contract of 10 saleentered into on the face of it by the vendor and the 80-year old mother of the applicants, these plots were purchased by the mother of the applicants; they were transferred in hei name on 9th September, 1978, and on the very same day she transferred them into the name of the applicants by way of gift In the 15 course of the investigation by the respondent the applicants were asked about the financial position of their mother. They said thatshe was an old woman of 80and that she had nomoney or any income. 20 The seller, on the other hand, signed a responsible statement in which he stated that the negotiations and transaction relevant to the sale of the said plots were made by the applicants, never by their mother, though the name of the mother appears in the contract of sale as the purchaser. One of the applicants paid by cheque the advance payment of part of theagreed purchase price and onthedate of the trans fer heissued anotherchequeinfavour of theseller for thebalance of the sale price. When, however, the applicants were asked to explain how their mother had acquired the said lands on the9th September, 1978,and transferred same intheirown name 30 on thevery same day, they replied that the only thing they knew was that theirmother gifted the said lands to them and nomore. They stated that they did not know how their mother acquired the lands or what their mother was doing. They simply knew that their mother gifted to them on 9th September, 1978, the 35 two plots of land. 25 40 In September, 1981, it was discovered and confirmed that the payments by cheque by the applicants, as aforesaid, were made. The dates of the contracts of sale are 20.9.1977 and 6.10.1977, respectively. The stipulated price was £13,000.but upon the wish of the applicants the sale price appears in 609 Stylianides J. HjilCraclis and Another \. Republic
(1984)the contracts as £4,000.- and £6,000.-, total £10,000.-, and this price was declared at the D.L.O. with the object of paying less transfer fees. The balance of the purchase price carried interest at 7% from the date of the contracts until payment. The respondent, exctcising his power under the Assessment 5 and Collection of Taxes Law, 1978-79, s.36(l), which provides that "where the Director isof the opinion that in icspect of any year of assessment the object of the tax of any person is reduced by any transaction which in his opinion was artificial or fictitious, he may disregard any such transaction and assess 10 the persons concerned on the proper object of the tax", decided that the transfer in the name of the mother of the applicants was fictitious; that what actually happened was that the applicants purchased thetwoplots from the vendor which they resold at a profit and further he decided that the difference between 15 the purchase price and the sale price was income liable to tax, as it was derived from an adventure or concern in the fature or trade.' As no agieement could be leached between the Director and the applicants, the Director proceeded and made the assessment, 20 determined the amount on the basis of the evidence available to him and notified the applicants accordingly. The decision of the respondent and notices of assessment were communicated to the applicants. The aplicants by virtue of s.21(l) of the Assessment and Collection of Taxes Law, 1978-79 (Laws No. 25 4/78, 23/78 and 41/79), filed these recourses. A recourse of this nature is governed by the same principles as any other recourse under Article 146 of the Constitution. 1. WAS THE INQUIRY FAULTY? It is well settled that failure on the part of the Administration 30 to carry out a sufficient inquiry into all the relevant factors is a ground for annulment of the decision of the Administration. In the present case the complaint of the applicant is a very limited one: that the respondent failed to interview the mother and specifically ask her where she had found the money and 35 whether the transaction was in fact made and negotiated or entered into on her behalf and not by her children. 610 3 C.L.R. HjiEracIis and Another τ. Republic Stylianides J. The applicants alone and in the presence.and with.the assist ance of their .accountant had a -number of meeting with the respondent. The seller, Flouris, was contacted and he -even signed a written responsible statement (Appendix " D " ) . The 5 applicants do not contest the statement of Flouris that they negotiated-all along;the purchase with : him; that the purchase .price was,paid .as aforesaid and"that-theanother simply signed the contract of-sale.and the declaration at the D.-LiO. .and.no more. The.applicants were asked about the financial condition 10 of.theii mother. They'.know their mother and they.said .that she is anold woman, 80years old,who'had nomoney orincome. The investigation lasted for over two years. It was submitted by learned counsel for the applicants that the applicants negotiated .the purchase all along with'-the seller 15 and everything was done by them for andion behalf-of'their mother due.to»theold ageand ineffect.thc-inability of themothcr to carry out such a transaction. Having iegard to all the circumstances of this case, including, inter alia, the age of the mother, the undisputed statements-of 20 the applicants, the statement of the seller, the payment by cheques by one of the applicants and the circumstances of the two transfers on the same day, I have not been persuaded that the inquiry was in any way faulty. A proper inquiry under the circumstances was cairied out. The interview of themother 25 would serveno useful purpose in theprocess of theexamination of the case. I have to note that the power of this Court is limited to the scrutiny of the legality of the action, and -to ascertain whether the Administration has exceeded the outer limits of its powers. 30 Provided they confine their action within the ambit of their power, an organ Of public administration remains the arbiter of the decision necessary to give effect to the law; and so long as they make a correct assessment of the actual background and act in accordancewith the notions<ofsound administration, 35 their decision will not be faulted. In the end, the Courts must sustain theit decision if it was reasonably open to them— (Mangli v. The Republic,
(1983)3 C.L.R. 52, and cases cited therein). The respondent is empowered by law to disregard any trans40 action which, in his opinion, is artificial or fictitious and assess 611 Stylianides J. HjiEractlj and Another τ. Rtpublic
(1984)the persons concerned on the proper object of the tax. "Arti ficial'*and "fictitious" have no definition but hardly anyone is needed. It is for the respondent to determine from his findingsof primary fact the further fact whether there was an act which was not real, anact without any commercial or busi- 5 ness purpose apart from a tax advantage. The primary facts are not in dispute. It is then for the Commissioner to draw theinferences from theprimary facts. This Courtwill interfere with theinferenceoffact only ina casewhere it is insupportable on the basis of the primary facts so found after due inquiry— 10 (Furniss (Inspector of Taxes) v. Dawson and related appeals,
(1984)S.T.C. 153-167). In my view the decision reached by the respondent was not only reasonably open to him but it is also unassailable. The transaction was afictitiousone; themother was used as a tool 15 in a preordained series of transactions tomask thefact thatthe actualpurchasers of thetwoplotsweretheapplicants themselves. 2. WAS THESALE BY THEAPPLICANTS A TRANSACT ION IN THE NATURE OF TRADE? Section 5(l)(a) of the Income Tax Law reads as follows:- 20 "5.—
(1)Tax shall, subject to the provisions of this Law, be payable at the rate or rates specified hereafter for each year of assessment upontheincomeof any person accruing in,derived from, or received intheRepublic inrespect of— (a) gains or profits from any trade, business, profession 25 or vocation, for whatever period of time such trade, business, profession or vocation may have been car ried on or exeicised". The expression "trade" shall include every manufacture or adventure or concern in the nature of trade—(Section 5
(2)(f)). 30 The issue raised is one of mixed question of law and fact which has to be decided in the light of the particular circum stances of each case—(Savvas M. Agrotis Ltd. v. The Commis sionerof IncomeTax,22 C.L.R. 27,at p. 30;Jones v. Leeming, 99 1 LJ. K.B. 318, at p. 322). 35 "Trade" is a word of very wide import; the word "trade" must be used in its ordinary dictionary sense and the other 612 3 C.L.R. 5 HjiEraclis and Another v. Republic Stylianides J. words of the definition must necessarily be intended to enlarge the statutory scope to be given to the word "trade". Whether the word "adventure" is intended to be read like the word "manufacture" as equally independent of the opening word "trade" or like the word "concern"as qualified by the attribute "in the nature of trade" does not matter—(Barry (Inspector of Taxes) v. Cordy, [1946] 2 AH E.R. 396). In Edwards (Η. M. Inspectorof Taxes v. Bairstow& Harrison, [1955] 3 All E.R. 48, Viscount Simonds said at p. 54:- 10 15 20 25 "To say that a transaction is, or is not, an adventure in thenatureof tiade istosay that; t has,or has not,thechara cteristics which distinguish such an adventure. But it is a question of law, not of fact, what are those character istics, or inother words, what thestatutoiy language means. It follows that the inference can only be regarded as an inference of fact if it is assumed that the tribunal which makes it is rightly directed in law what the characteristics are and that, I think, is the assumption that is made. It is a question of law what is murder; a jury finding as a fact that murder has been committed has been directed on the law and acts under that direction". Each case must be considered accoiding to its facts; the question to be determined being—Is the sum of gain that has been made a mere enhancementof value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit making? (Californian Copper Syndicate (Limited and Reduced) v. Harris, 5 Tax Cases p. 159, at pp. 165-166). The test is whether the transaction exhibits features which 30 give it the charactei of a business deal. A single transaction rarely (not never) attiacts income tax—(Greenbe'rg v. I.R.C., [1971] 3 All E.R. 136 (H.L.)). Lawrence, L.J., in Jones v. Leeming, [1930] 99 L.J. K,B. 17, at p. 24, said:35 "Speaking foi myself, I have the greatest difficulty of seeing how an isolated transaction of this kind, if it be not an adventure in the nature of trade, can be a transaction ejusdem generis with such an adventure and therefore fall 613 Stylianides J. HjiEraciis and Another \. Republic
(1984)within Case VI. All the elements which would go to make sucha transactionanadventure in'the natureoftradewould. inmy opinion, be required to make ita tiansaction ejusdem generis with such an adventure. It seems to me that in the case of an isolated transaction of the sale and resale of 5 property there is really no middle course open. It is either an adventure in the nature of trade, or else it is simply a case of sale and resale of property". This was approved by -the 'House of Lords. In determining the question posed the following factors must 10 be taken into consideration in this case: the nature of the land and -the income that it is producing—present and future—the manner of the finance of the transaction, the intention of the purchaser at the time of the acquisition, the prevailing circumstances in the country or inthe area, the occupation and know- 1 s ledge of the taxpayer and the length of period that the taxpayer has the ownership of the land sold. In Agrotis case (supra) Hallinan, C.J., said at pp. 33-34:"I think it is admissible for the Court below and for us on appeal to take into account the part that real estate 20 plays in the economic life of Cyprus. Here, the mam and almost solefieldfor investiment isimmovable property. There is no stock exchange and almost all businesses, and corporate bodies carrying on business, are private and not public in nature. Most Cypriot individuals and families 25 of substance put their money into land as an investment and the Companies whose shareholders are members of a family areformed notfor thepurpose of buyingand selling land or speculating therein but for the purpose of maintaining the unity of the estate and of investing the family 30 assets in immovable property". During the thirty years that elapsed since the decision in Agrotis case, we witnessed a rapid development in the country, especially touristic in certain areas including Paralimni, the concentration of the inhabitants in some vicinities for reasons 35 not necessary to be enumerated, the galloping of prices of land and real property with developing prospects becoming a commodity of trade. The aforesaid gave rise to a class of develop614 3 C.L.R. HjiEraclis and Another v. Republic Stylianides J. ers and speculators of land. Furthermore speculation in land has become an incident of common occurrence. The business knowledge of the taxpayei or of his associates may indicate the commercial nature of the transaction. 5 10 In Pinson\s Revenue Law, 6th edition, p. 24, we read:"It is in general more easy to hold that a single transaction entered into by an individual in the line of his own trade (although not part and parcel of his ordinary business) is an adventure in the nature of trade than to hold that a transaction entered into by an individual outside the line of his own trade or occupation is an adventure in the nature of trade". A transaction must be examined objectively—(Makrides v. The Republic,
(1967)3 C.L.R. 147. See, also, Droussiotis 15 v. The Republic,
(1967)3 C.L.R. 15). In the present case the applicants are building contractors of Paralimni, an area where the price of land is galoping due to an outburst of touristic development. They were in a position to know of speculative land dealings in the area. The land 20 was purchased mainly on credit. It was land that acquired a development value. They resold the property a few months after thecompletion oftheir purchaseat apricemorethan double the price at which they had acquired it. In the process of acquisition they applied a scheme of fictitious transaction, that 25 is to say, they used their mother as a tool so as to appear that the property in question, purchased by them, was gifted to them by their mother. AH the above point lo one direction: that though it is a sole transaction by these applicants, neveitheless, the purchase was not for investment but for tiading pur30 poses. On the totality of the circumstances of the case I find that the only reasonable conclusion to be drawn is the one reached by the respondent Commissioner and there is nothing justifying me to interfere with it. 35 40 In the result the sub judice decisions are confirmed and the recourses are dismissed. In the circumstances of these cases I see no reason why ths applicants should not pay the costs of the respondent. Such costs to be assessed by the Registrar. Recourses dismissed with costs against the applicants. 615