clr/1987/1987_3_1455.pdf

(1)and 13(e)— Entertainment expenses — Burden of proof of an exemption or deduction ison applicant—No disOnction inlaw between entertainment expenses andclients'andsuppliers'entertainment expenses. 5 Companies — The rule against lifting the veilofincomoration—Exceptions— Income tax — Commissioner disallowed part of an amount claimed to be deducted asinterestpaid by applicantto itsBank on ground thatsuchpart relatedtopersonalloansmade to theDirectors — This case falls withinthe exceptionstotheaforesaidrule. 10 Administrative law—General·principles—Fairadministration —Acceptingand assessingincomeofemployee (beshe thewifeofadirectorornot)andatthe same time-refusing toallowrelevantdeduction toemployer —Contraryto principlesoffairadministration. 15 20 Administrativelaw—Dueinquiry—Incometax—Assessingincomeofemployer withoutwaitingfortheaccountsofemployer —Subsequentrefusaltoallow employer todedu·. *;alaryofemployee —Lackofdueinquiry. Bymeansofthisrecoursetheapplicantchallengesthedecision relatingto itsincometaxliabilityfortheyears1980,1981and 1982andtoitsliabilityto Special Contribution for the quarters ended 30.680. 30.9.80. 31.12.80, 31.3.81,30.6.81,30.9.81,31.3.82,30.6.82,30.9.82.31.12.82. Thepointsindisputebetweenthepartiesareasfollows: 1455 MitsiosTrading v.Republic

(1987)A)TheCommissioner disallowedpartof theinterestpaidtoitsbankbythe applicant, onthegroundthattheaforesaidpartrepresentedinterestcharged onloansforthepersonaluseoftheDirectoroftheapplicantcompanyandnot for thebenefit ofthe company. In this respect applicant complained, inter alia, that the respondent lifted theveilof applicants'incorporation. 5 B) Clients' and Suppliers' Entertainment Expenses and Travelling Expensesabroad. C) Writing off machinery. In fact, the applicant claimed 100% first year allowanceinvirtueofs.I2

(2)(d)(iii),whilsttheCommissioner,takingtheview thatpartofwhatwasclaimedtobemachinerywasplantallowed100%ofthe valueheconsideredasmachineryandasregardsthatwhichheconsideredas plant heallowedcapitalallowance under s. 12

(2){a)of theIncome TaxLaws 1961-1983. D)TheCommissionerrefusedtoallowdeductionofthesalaryofMrsKatina Andreou,who isthewifeof themanagingdirector of the company. 10 15 Itmustbe noted that thesalary,which theapplicant claimedthat itshould bededucted from itstaxable income,wasdeclared by Mrs.KatinaAndreou, in her own tax returns aspart of her income and that the Commissioner acceptedsuchtaxreturns. 20 The Commissioner maintains that «theassessement of theincome ofMrs. K. AndreouisdealtwithbyanothersectionoftheDistrictIncomeTax Office and when the return is received that section may raise the assessment accordingly anddoesnot wait fortheaccountsofthecompany». Held, annulling thesubjudicedecisioninpart:

(1)The rule against liftingtheveil of incorporation of acompany (the rule inSalomonv.Salomon[1897]A.C.22)issubjecttoexceptions.Thiscasefalls within one of the exceptions.The respondent wasentitledin examiningthe aforesaidissue(A),to lifttheveilof incorporation.

(2)In the light of the material before the Court the subjudice decisionas 3 0 regardsissues(A)and(C)abovewasreasonably opentothe Commissioner.

(3)In income tax laws there is no distinction between entertainment expensesandclients' andsupplier'sentertainment expenses. Entertainment expensesareallowable asanexpensewhollyandexclusively incurredinthe production of income on the basis of the combined effect of ss, 11

(1)and 3 5 13(e) of the Income Tax Laws 1961 - 1981.The burden is always on the applicants to prove the exact amount of such expenses by furnishing documentaryevidence.Theburdenofproofofanexemptionordeductionis ontheapplicants. 1456 25 Mltslos Tradingv. Republic 3C.L.R. Inthelightof thematenalbefore thisCourt,thesubjudicedecisioninso far asitrelatestotheissue ofentertainmentexpenses was reasonably opentothe Commissioner 5 10

(4)Itisagainst thepnnciplesof fair administrationtoacceptandassessthe incomeof anemployee - beshethewifeofadirectorornot,-andatthesame time refuse toallow a relevant deduction totheemployer Moreover as the respondent Directoradmits he proceeded to assess the employee without waiting for the accounts of the applicant company - the employer This tantamount^ in myview tofailure to carry out due inquiry in respect of this particularitemofthesub-judice decision,andthisvulnerablepartofsamehas tobeannulled Sub/udice decision annulled inpart No orderasto costs Casesreferredto 15 Georghiadesν TheRepublic

(1982)3 C LR 659, Bankof Cyprus(Holdings)Ltd ν TheRepublic (19S5) 3 C LR 1883. Repubtcv KEMTAXlLtd andAnother (\9S7)3 CLR 1057, ManufacturersLife Insuranceν TheRepublic

(1967)3 C LR 460, H/jVianmsv TheRepublic

(1966)3 C LR 338, 20 Kittides ν TheRepublic

(1973)3 C LR 123 TylhsandCo ν Republic

(1986)3 C LR 401 Recourse. Recourse against the income tax assessments for the years 1980-1982 and for special contribution purposes for the quarters 25 ended during the period 30.6.80-31.12.1982 raised on applicants. N.Pelides,for the applicants. Y.Lazarou, for the respondents. Cur. adv. vult 30 LORISJ. read thefollowingjudgment. By means of the present recourse the applicants impugn the decision of the Respondent Commissioner of Income Tax by virtue of which the applicants were assessed to pay income tax for the years 1980-1982 amounting to £3,211.-, £3,165.-, and £1,483.- respectively and 35 foi special contribution purposes for thequarters ended: 30.6.80, 1457 Lorl»J. Mltsio·Trading v.Republic

(1987)30.9.80, 31.12.80, 31.3.81, 30.6=81, 31.3.82, 30.6.82, 30.9.82, 31.12.82 amounting to £600.-, £1,343.-, £1,411.-, £884.-, £1,344.-,£1,682.-, £2,500.-,£1,500.-,and £2,500 respectively. The applicant company was incorporated in May, 1980 as a private company of limited liability; it took over the business of 5 DemetriosP.Andreou,ManagingDirectorand major shareholder ofapplicant company. Theauditorsoftheapplicantcompany prepared and submitted tothe respondent commissioner itsretum ofincome and audited accounts for the aforesaid years, which the respondent 10 commissionerrefused toacceptintheirtotalityand inparticularin relationtothefollowingitemswhicharethesubstantial differences around which thepresent recourse revolves: (l)Mrs.KatinaAndreou'ssalary;

(2)Bankinterestcharged onthedirectors;

(3)Clientsand suppliersentertainment expenses;

(4)Travellingexpenses abroad;

(5)Writingoff machinery. I intend to examine these items one by one, leaving, for convenience sake, Mrs.Andreou'ssalaryatthe end. 15 20 Bank Interest Charged on theDirectors: The whole of bank interest paid by applicant amounting to 2,626 for 1980 and £4,054 for 1981 respectively, claimed as leductions by the applicants, does not, in the opinion of the 25 espondent Commissioner refer to amounts:in connection with expenses wholly and exclusively incurred in the production of pplicant company'sincome.Intheopinion oftheDirector,inthe iankloansoroverdraft accounts,thefollowingsumsdrawnbythe Krectors-shareholders of the applicant company for their 30 >ersonaluse are included: (i)£24,000 drawn by Mrs.Katina Andreou, Director, from her iusband's business-before it was being taken over by applicant ompany in May,

1. The sum was procured from loans >rovidedbyherhusband'sbankersandwhichweretakenoverby 35 heapplicant company. Thesumsdrawn byMrs.KatinaAndreou vere used for erection ofabuilding. 1458 3 C.L.R. MltslosTradingv.Republic Lor!»Λ. 00 £5,908.- This sum was drawn by Directors of applicant companyinadditiontotheiremolumentsfortheperiod 13.5.8031.12.
2. (iii) £27,
3. This sum was drawn by applicant company in 5 1981 inadditiontotheirsalaries fortheyear
4. Thereasons why therespondentCommissionerdisallowed the sumsof £2,300 for 1980 and£2,100 for 1981 arestated inpara. 6{b) of the facts inopposition as wellas inpara.4 of thewritten address on behalf of the respondent. It is the stand of the 10 respondent Commissioner thattheloans inrespect of which the interest was charged were loans for personal use andnotforthe benefit of thecompany and,therefore, notexpenses wholly and exclusively incurred in the production of income so that to be allowable deductionsundertheIncomeTax Law. 15 Having carefully gone through the record and the material before me,IamsatisfiedthatthedecisionoftheDirectorinrespect of this item was reasonably open tohim(Lillian Georghiades v. TheRepublic

(1982)3C.L.R.659). Thecomplaintof theapplicantinconnectionwith thisitem, to 20 the effect that «the respondent by charging interest on the said £24,000.-toMrs. K.Andreouareineffect attemptingtolifttheveil of incorporationand thusavoid theseparate legal personality of theapplicantcompany»isillfoundedanditisherebydismissed for thefollowing reasons: 25 Inthecase of Bankof Cyprus (Holdings) Ltdv. The Republic

(1985)3C.L.R. 1883, decided bytheFullBenchofthisCourtthe following were stated at p. 1889 «the case of Michaelides v. Gavrielides

(1980)1C.L.R.244,arentcontrolcase,leftnoroom for lifting theveil of incorporationunder any circumstances. We 30 are of the view that notwithstanding what was stated in Michaelidescase,inapropercasetheremaybeexceptionstothe ruleinSalomoncase.» In therecent case ofthe Republic v. KEM TAXI Ltd and another (R.A.600 -judgment delivered on21.7.1987-stillunreported)*it 35 was held by the FullBench of thisCourtthat«the appellant(the •Rctjortedln

(1987)3C.L.R. 1057. 1459 LorisJ. Mitsios Trading v.Republic

(1987)Minister of Communications &Works) wasperfectly entitledto pierce theveilof incorporationofthecompaniesconcernedashe did,and examine «the realities ofthe situation.» (The topic of lifting theveil of a corporation is expounded at length inPalmer's Company Law 22nd ed. atpp. 160-163 and also inGowersModemCompanyLaw3rd ed.atpages 189-217). 5 Bearing in mind thelegal aspect on this issue, asabove stated, and having considered the particular facts of this case, 1 hold the viewthatthe present case falls within theexceptions tothe rulein Salomon's case and therespondent Commissioner was therefore 10 perfectly entitled to go behind the veil of incorporation of applicant company,ashein fact did, inreaching atthe sub-judice decision in connectionwith thisitem. Clients' and Suppliers' Entertainment Expenses andTravelling Expenses abroad: 15 I consider itconvenient todeal with these two items together. It must be stated at the outset that ί am in agreement with learned counsel appearing for the respondent (a)thatinincome tax laws there is nodistinction between entertainment expenses and clients' and suppliers' entertainmentexpenses; 20 (b) that entertainment expenses areallowable as an expense wholly andexclusively incurred inthe production of incomeon the basis of the combined effect of ss. 11

(1)and 13(e) ofthe Income Tax Laws 1961and 1981 as explained in the case of Manufacturers Life Insurance v. TheRepublic,

(1967)3 C.L.R. 25 460; (c) thattheburden isalwaysontheapplicantstoprove theexact amount of such expenses by furnishing documentary evidence. The burden of proof of an exemption or deduction is on the applicants {HjiYiannis v. TheRepublic,

(1966)3C.L.R.338 atpp. 30 350 -351; Kittides v. The Republic,,

(1973)3 C.L.R. 123at p. 133.) Having given themattermybest consideration inthelight ofthe record and the material before me,I am satisfied thatthe decision of therespondentinrespect oftheseitemswas reasonably opento 35 him as well, and in the circumstances this Court should not interfere. 1460 3 C.L.R. MitsiosTradingv.Republic LorlsJ . Writing off Machinery. 5 10 15 20 25 30 35 The claim for deduction in respect of this item may be briefly stated asfollows:Theapplicantcompanyin1982purchased atthe cost of £9,035 machinery and in respect of which they claimed 100% first year allowance as provided by s. 12

(2)(d)(iii) of the Income Tax Laws 1961-

1. The respondent allowed only £4,500 machinery to be written off, for the reasons stated in paragraphs 8 and 9 ofthe opposition. Paragraph 9reads as follows: «
2. Applicant Company rendered the invoices and particulars of the said new machinery to establish the components and natureofthe machinerybuttohaveabetter picture whether allcomponents were eligibleforthefirst year capital allowance, Mr. Chr. Karakannas, Officer in chargeof the Nicosia IncomeTaxOffice andMr.Photos Papadopoulos theofficer examiningApplicantCompany'sincometax affairs visited the premises of Applicant Company on 6 December, 1983 and inspected the said new machinery. Applicant Company's auditor Mr. K. Kashoulis was present as well. Upon inspection ofthemachinery itwasfound outthatnotall components forwhichthefirstyearcapitalallowance claimed weremachinery.Partwasplantand partwasmachinery.Thus against the objections of Mr. Kashoulis, auditor of Applicant Company, MessrsKarakannasand Papadopoulos concluded that machinery to the value of £4,500 were eligible for the 100% first year capital allowance and the resttothevalueof £4,
3. - were eligible for capital allowances as plant as providedunderparagraph (a)ofsubsection

(2)ofsection 12of the Income TaxLaws 1961to 1983.» Havinggone through therecord and thematerialbefore me,in respect of thisparticularitem,Ihold the viewthatthedecision of the respondent Commissioner on these particular items was reasonably open to him and his interpretation placed on the corresponding sections ofthe lawcannot be faulted. Ishall now deal with whatappears tobecomplaint No. 1inthe written address of the applicant, notably the salary paid to Mrs. Andreou: Independently of the fact whether Mrs.Andreou isthe wife of Mr.DemetriosAndreou, (afactwhichcanberevealedbypiercing 40 the veil of the Corporation, a legal point which I had the 1461 LorisJ. Mitslos Trading v.Republic

(1987)opportunity of dealingwith,earlieron inthe presentjudgment), the fact remainstha*Mrs.Andreousubmitted herannualincome tax returns for the years 1980-1982 which the respondent Commissioner acceptedandthetaxwasaccordinglypaid.Inthis declaration her salary declared and accepted by the 5 Commissionerwas£1,080for1980,£1,600for1981;and£2,400 for 1982. Now,therespondentCommissionerinthepresentcasedoesnot allowtheseamountstobedeductedfromtheapplicantcompany assalary paid toan employee,and although headmitsthatMrs. 10 Andreou's return for 1980wasaccepted and anassessmentwas raised according to her declaration, he maintains that «the assessment of the income of Mrs. K. Andreou is dealt with by another section of the District Income TaxOffice and when the return is received that section may raise the assessment 15 accordinglyanddoesnotwaitfortheaccountsofthecompany.» Itisagainsttheprinciplesoffairadministration(videTyllis&Co v.Republic

(1986)3C.L.R.401atp.413)toacceptandassessthe incomeofanemployee-beshethewifeofadirectorornot,-and at the same time refuse to allow a relevant deduction to the 20 employer. The explanation given by the respondent Commissioner -set out verbatim above -points also at another factorwhichmilitatesagainstthevalidityofthesub-judicedecision inrespectofthisparticularitem:«failuretocarryoutdueinquiry-» Mrs.Andreou,theemployeesubmittedherannualincomereturns 25 declaring therein the amounts she received from the applicant company as salaries for the respective years of assessment; her statements in the returns were accepted by the respondent Commissioner and he proceeded to assess her income accordingly;Iholdtheviewthatitwashisdutyatthesametimeto 30 carryoutdueinquiry,inordertoascertainwhetherheremployer, theapplicantcompany(declaredinherreturnsassuch)hadstated in the relevant returns whether such a salary was paid to the aforesaid employee ornot.AstherespondentDirectoradmitshe proceeded to assess the employee without waiting for the 35 accounts of the applicant company-the employer. This tantamounts in my view to failure to carry out due inquiry in respect ofthisparticular itemofthesub-judice decision;andthis vulnerablepartofsamehastobeannulled. 1462 3 C.L.R. MitsiosTrading v.Republic Loria J. In the result the sub-judice decision as regards all other items was reasonably open to the respondent Commissioner and it is hereby confirmed; that part of the sub-judice decision which refers-to Mrs. K. Andreou's salaries for the years 1980-1982 is 5 hereby declared nullandvoidand ofnoeffect whatsoeverfor the reasonsabove stated. Letthere be no orderastocosts. Sub judice decision partlyannulled. No orderasto costs. 10 1463