(1984)1984 July 12 [PIKIS, J.] IN THE MATTER OF ARTICLE 146OF THE CONSTITUTION NINA RAINBOW, Applicant, v. THE COMMISSIONER OF INCOME TAX, Respondent. (Case No. 11/83). Income tax—Assessment—Deductions—Discretion oj Commissioner under section 51 oj the Assessment and Collection oj Taxes Law, 1978 (Law 4/78) to reject a claimjor deduction notwithstanding its apparent nature in the absence oj reliable audited'accounts— Legitimate jor Commissioner, in the exercise oj such discretion 5 to have regard to the conduct oj the taxpayer in its entirety in connection with the discharge oj his obligations under the Law. Applicant was running a restaurant-bar business in rented premises at Larnaca. She was not keeping any records of revenue or disbursements and she did not submit audited |Q accounts. Following a submission by her of a statement of assets and liabilities as at 31.12.80 at the instance of the Commissioner, the latter made inquiries about the accuracy of previous statements of income by her and raised the assessment complained of in this recourse. Counsel for the applicant 15 mainly contended that the sub judice decision was liable to be set aside for lack of reasoning in rejecting the claim of applicant for a proper discount of her income for salaries paid to her husband and in making proper allowance for the element of goodwill represented in the sale price of her business. 20 Held, that section 51 of the Assessment and Collection of Taxes Law, 1978(Law 4/78) confers power on the Commissioner to reject a claim for deduction notwithstanding its apparent nature in the absence of reliable audited accounts; that in exercising his discretion under s.51 it is legitimate for the Com- 25 846 3 C.L.R. 5 10 15 20 Rainbow v. Republic missioner to have regard to the conduct of the taxpayer, in its entirety, in connection with the discharge of his obligations undei the tax law; that a taxpayer who is less than forth cominginthedeclaration of his incomeandfails to keeprecords to substantiate deductions from his taxable income, can hardly expect the Commissioner to exercise his discretion, under s.51, in his favour; that the burden of substantiating before the Court the legitimacy of deductions from taxable income,lieson the taxpayer; that confronted with the lacuna in the financial affairs of the applicant, the Commissioner carried out whatever inquiries were possible in the circumstances, with a view to ascertaining her true liability to tax; that certainly, it was reasonably open to the Commissioner to arrive at the decision he did, and nothing said in these proceedings persuades this Court otherwise; accordingly the recourse must fail. Application dismissedPer Pikis,J.: The payment of income tax constitutes a social duty upon the diligent discharge of which depends the effective functioning of themodernStateand realisation of social objectives. Avoidance of tax erodes economic planning and makes for uneven distribution of social burdens contrary to Article 24.1 of theConstitution. Section51aims toseal thedoortothe unmerited avoidance of tax. It is in this spirit it must be read and applied. 25 Cases referred to: Lord Chetwode v. I.R.C. [1976] 1 All E.R. 641; [197η 1 All E.R. 638; I.R.C. v. Church Commissioners jor England [1974] 3 All E.R. 529; [1976] 2 All E.R. 1037 (H.L.); 30 Shiner v. Lindblom[1960] 3 All E.R. 832; HadjiYiannis v. Republic
(1966)3 C.L.R. 338; Georghiades v. Republic
(1982)3 C.L.R. 659 at pp. 667-
- Recourse. Recourse against the decision of the respondent to review the 35 income tax assessments raised on applicant for the income years 1975, 1976 and
- A. Poetis, for the applicant. Mi. Photiou, for the respondent. Cur. adv. vult. 847 Rainbow τ. Republic
(1984)PIKIS J. read the following judgment. In the course of in vestigating the tax affairs of the applicant, the Commissioner inclined to the view she had been undertaxed. To this con clusion he was driven because of the otherwise unaccountable increase in theassets of the applicantemerging ona comparison 5 of capital statements, submitted by applicant in November, 1974 and December 1980, respectively. Invoking his powers under s.23 of the Assessment and Collection of Taxes Law 4/78, he reviewed the assessments of income tax liability of the applicant for the income years 1975, 1976 and 1977. The de- 10 cision was communicated to the applicant by a letter dated 26.10.82, disclosing thereinhisreasons for thereviewof previous assessments (Appendix C*to the opposition). The recourse is directed against the soundness of this decision, invalid in the contention of the applicant, for over-statement of her gross 15 income,as wellas omission onthe part of the Commissionei to make proper allowance for deductible expenditure, as well as inclusion in her income of a sum of money not qualifying as income.* Applicant was running a restaurant-bar business in rented 20 premises atLarnaca. Sofar asonemaysurmisefrom thehistory of the dispute πcited in the opposition, she hardly kept any records of revenue and disbursements; nor did she submit audited accounts. Hei assessment to income tax before revision, was principally based on her statement of her income. 25 In face of this disorderly state of affairs, it was proper on the part of the Commissioner to require the applicant to submit a statement of assets and liabilities as at 31.12.80, in order to discern therefrom herfinancial position with aviewto determin ing her tax habilities. Following this disclosuie, and the in- 30 quiries madeby the IncomeTax Authorities about theaccuracy of previous statements of income made by the applicant, the latter engaged an accountantto advise her on hei tax liabilities and negotiate.a settlement with the Authorities. Failing a settlement,theCommissioner resolved thematterby thedecision 35 under review. At the hearing, following the submission of written addresses onbehalf of theparties,thechallengemounted against the decision, was confined to two matters:* For a definition of "income", see, Lord Chetwode v. IRC (19771 I All E.R. 638 (HL); Lord Chetwode v. IRC [1976] 1 All E.R. 641 (CA>—Judgment of Sir John Pennycuick. 848 3 C.L.R. Rainbow v. Republic Pikis J (
- a)Unjustified refusal of the respondent to discount the incomeoftheapplicant by£15,000.-and not£7,900.-foi salaries allegedlypaid to the hutband of the applicant, and '5 (
- b)wiongful omission to make proper allowance for the elementof goodwillrepresented inthesalepriceofher business, evidenced by a written agreement dated 4.2.80 (exhibit 1). Itisthecasefor theapplicant that thedecisionisliabletobeset 10 asidefor lackofreasoninginrejectingtheclaimofapplicant for a properdiscount ofherincometoreflect theabove,andlackof proper inquiiy into the validity of her claims. Another claim for wrongful non discount of her taxable incomearisingfiomincreaseofcapitalaccruingfrom remittances 15 from theUnitedKingdom,wasrightlyabandonedintheabsence of any supporting evidence. Counselfor theCommissionersupposed the decision as well founded. Not only applicant was notwronged butinthefinal analysistheassessmentwasactually benevolent for her. In actual fact, it contained an element of 20 concession on the part of the Commissioner. For he could legitimately reject the claim for payment of salaries to her husband,in theabsenceof anyevidenceto support it. Equally warranted was,inhis submission, thedecision oftheCommissioner totreat thereceipt of £4,700.--as wholly referable to the 25 saleof furniture, fittings and equipment of the restaurant of the applicant, in the absence of (
- a)proper identification of the element of goodwill in the sale price, and 30 (
- b)the circumstances surrounding the execution of the agreement, particularly theabsence of anyrightonthe part of the applicant to sublet the premises. 35 Asamatteroffact,inquiriesmadebytheCbmmisionerf revealed that under the terms ofthelease,wherebyshe had possession of the premises, she had no right to sublet thepremises; subletting, or,moreappropriately,theinstallationofthepurchasei inthepremises,was madewithouttheauthorityoftheownerwhocontinued to collect rent from the applicant. All that belonged .849 Pikis J. Rainbow τ. Republic
(1984)to her to dispose of, were the furniture and fittings in the premises. Itis settled on authority thatthefact-finding bodyconcerned with the determination of the liability to tax of the taxpayei, may receive extrinsic evidence in relation to the nature of a 5 transaction in order to appreciate its true nature and effect (see, IRC v.Church Commissionersjor England[1976]2All E.R. 1037 (H.L.); IRC v. Church Commissionersjor England [1974] 3 All E.R. 529). On the other hand, it must be said that had the Commissioner been satisfied that the amount of £4,700.-- 10 represented,wholly or inpart, thesaleof goodwill of a business, it would be right on his part to ignore such receipt for income tax purposes, unless he had reasons to believe that applicant traded in the build up of goodwill and its sale, either in the course of her ordinary business or by adventuring in the matter 15 with a view to profit - See, Shiner v. Lindblom[1960] 3 All E.R. 832. Section 51 of Law 4/78 confers power on the Commissioner to reject a claim for deduction notwithstanding its apparent nature in the absence of reliable audited accounts. The ack- 20 nowledgment of such discretion to the Commissioner to reject claimsfor deductionsunlessproperly validated,isjustified inthe context of the income tax legislation in view of the peculiar knowledge of a taxpayer of his financial affairs and amenityto document them. In fact, unless he documents his affairs, it is 25 next to impossible to ascertain his precise incomeand,moreso, his taxable income. If it was not for this power, a taxpayer might be allowed to shield behind a cloud of uncertaintythatis mostly his creation. Thepayment of incometax constitutes asocial duty uponthe 30 diligent discharge of which depends theeffective functioning of the modern State and realisation of social objectives. Avoid ance of tax erodes economic planning and makes for uneven distribution of social burdens contrary to Article 24.1 of the Constitution. Section 51aimstoseal thedoortotheunmerited 35 avoidance of tax. Itis inthisspirititmustbereadandapplied. The discretion vested in the Commissioner undei s.51 must, like every discretionary power, be reasonably exercised with a 850 3 C.L.R. Rainbow v. Republic Pikis J. view to promoting the aims of the law. In exercising his discretion, it is legitimate for the Commissioner to have regard to theconduct of the taxpayei,in itsentirety,in connection with the discharge of his obligations under the tax law. On a review of 5 the facts of the caseas a whole,one can infer that applicant was lessthan forthcoming in the declaration of her income. Failure to keeprecords did not facilitate the ascertainment ofher taxable income either. There is substance in the submission of counsel for respondent that reduction of her taxable income for any 10 amount on account of the payment of salaries to her husband, can rightly beregarded asa concession on hispart inthe absence of records evidencing such payments. Liability of the applicant to tax, did not arise from her statements but was revealed indirectly on investigation of her assets. Faced with the prospect 15 of paying tax, the applicant kept raising claims for deductions previously unmentioned. In the light of his investigations the Commissioner could tieat the amount of £4,700.-, lealised from thesaleof her business,assolelyreferable tofurniture equipment and fittings of her business. 20 A taxpayer who is lessthan forthcoming in the declaration of his income and fails to keep records to substantiate deductions from histaxable income, can hardly expect the Commissioner to exercise his discretion, under s.51, in his favour. And the burden of substantiating before the Court the legitimacy of 25 deductions from taxable income, lies on the taxpayer - See, HadjiYianni v. Republic
(1966)3 C.L.R. 338. Confronted with the lacuna in the financial affairs of the applicant, the Commissioner carried out whatever inquiries were possible in the circumstances, with a view to asceitaining hei true liability to tax. 30 Certainly, it was reasonably open to the Commissioner to arrive at the decision he did, and nothing said in these proceedings persuades me otherwise - See, Georghiadesv. Republic
(1982)3 C.L.R. 659, 667-669. The recourse fails. It is dismissed. Let there be no order as 35 to costs. Recoursedismissed. No orderas to costs. 851