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(1987)1987December30 [A LOIZOU JI INTHEMATTER OFARTICLE 146 OF THECONSTITUTION CHRISTODOULOSLEONIDA Applicant, υ THEREPUBLICOFCYPRUS,THROUGH THEMINISTRY OFFINANCEAND/OR THE DIRECTOR OFINCOME TAX, Respondents (Case No 978/85} Contract —Assignment —Agreement without consideration fortheassignment of interest due to applicant by company A to company Β (applicant's family company)— Company A notaparty tosuchagreement—Agreement void Taxation—Incometax — Agreement toassignapplicant's income, ι e interest due tohimbycompany A, to company Β— The mortgage secunng thecapital of the debt and the interest payable thereon remained in the name of the applicant — Whether interest could continue tobecharged on applicant's chargeable income — Testapplicable —In the circumstancesof thiscase the question wasanswered m the affirmative 5 The presentrecourse isdirectedagainst the income tax assessments for the 1 0 years of assessment 1979to 1982 (years of income 1979to 1982 both inclusive) The recourse, affects it seems, also the special contribution assessments relating to the four quarters of each of the year ended31st December, 1979,31st December 1980,and 31st December,1981 The question that hastobedecided in this case is whether the interest, 1 5 which wasdue totheapplicant byArmonia Estates Ltd, under a mortgage agreement, could be charged, as it was in fact charged by thesub judice decisions, toapplicant's chargeable income, notwithstanding that under an «agreement dated3.1 80»such interest wasin factcollectedbyAndros and BrothersHotel Apartments Co Ltd, which isapnvate family company ofthe 2 0 applicant, his wife and children The said agreement of 3 180 appears in the minutes of «Andros and Brothers Hotel Appartments Co Ltd»The matena! part reads as follows «Chnstodoulos Leomda offeredto assign to the company the whole amount 1956 3 C.L.R. Leonlda v. Republic he has to receive from ARM0N1A ESTATES Ltd The meeting acceptedthe offer of Chnstodoulos Leonida anddecides that {b)Any amount of interest of the debt of ARMONIA ESTATES be deemed as income of the company » 5 10 15 20 It mustbe notedthatArmonia Estates Ltd was notapartyto the agreement and that the mortgage remained in the name of the applicant until the final discharge of the debt Held, dismissing therecourse
(1)The agreement of the 3rd January 1980 is in effect an undertaking or arrangement made between the applicant and his company Andros Brothers Hotel Apartments Co Ltd for no consideration Armonia Estates Ltd was not a party to it Hence it could not be binding in law
(2)Assuming that the said agreement was valid, the question is whether it constitutes an effective disposition or alienation or absolute assignment of income, or merely to a charge or application of income In the first case the income cannot be charged to applicants chargeable income, whilst in the second case it should be so charged (Kitromelides ν The Republic {1973) 3 C L R 123, Perkins' Executors ν The Commissioner ofInland Revenue, 13 Τ C 851 and ChansGeorghalhdes, 23 C L R 249 citedwith approval)
(3)Underthe arrangement of3 180 thepropertyintheinterest didnotpass to the applicant's pnvate family company, the mortgage in question continued tobe in theapplicant's favour until itsfinalsettlement in 1982,and he had exclusive nght to the interest accruing from the debt due to him by Armonia Estates Ltd ,the latter being answerable in law only to him for the payment of such interest 25 Recourse dismissed No order asto costs Cases referred to Kitromelides ν The Republic
(1973)3 C L R
  1. Perkins'Executors ν The Commissioner of Inland Revenue, 13Τ C 851, Georghalhdes, 23 C L R 249 30 Recourse. Recourse against the income tax assessments raised on applicantfor theyearsof assessment 1979-
  2. A. Magos, forthe applicant. Y.Lazarou, forthe respondents. 35 Cur. adv. vult. 1957 Leonid*v.Republic
(1987)A. LOIZOU J. read the following judgment. The present recourse is directed against the income tax assessments for the years of assessment 1979 to 1982 (year of income 1979 to 1982 both inclusive) details of which appear in the Schedule to the opposition, (Appendix «A»),The recourse, affects it seems, also thespecialcontribution assessmentsrelatingtothefourquartersof each of the years ended 31st December 1979, 31st December 1980, and 31st December, 1981, as shown in Appendix «B», though nospecific mention ismade init. 5 The applicant derived at the material time his income from 10 emoluments asan employee ofthe ElectricityAuthorityof Cyprus up to the 31st October 1981 and from the 1stAugust 1981 as a director of his private family company Andros Brothers Hotel Apartments Co. Ltd., of Paphos; moreover he derived income from interest from Armonia Estates Ltd., of Paphos and also 15 received bank interest. Hesubmitted hisreturnofincome fortheyear 1979on the21st April, 1980 and declared as income only his salary from the ElectricityAuthorityamountingto£3847.Hewasassessed on the 23rd August 1980 only on this salary but he objected against the 20 assessment on the 2nd September 1980, claiming relief for a disabled child. His return of income for the year 1980 was submitted on the 11th June 1981,and again he declared as only income hissalary of £4691 from the ElectricityAuthority. He was assessed on the 19th October 1982, but the respondent 25 Commissioner added tothissalaryanamount of£5000as earned interest. The applicant objected against this assessment, (Appendix «C»).Claiming that he did not have any income from interest and stating that the interest from Armonia Estates Ltd., belonged to Andros and Brothers Hotel Apartments Ltd., by 30 assignment (Appendix«D»). Asnoreturnofincomewassubmitted bythe applicant for theyear 1981,therespondent Commissioner assessed him on the 19th October 1982 on the basisof available information. An objection against thisassessment was submitted (Appendices «C»and «D»).On the 18th May, 1983,the applicant 35 was requested to submit his return of income for the year 1981 which he did on the 27th May, 1983 declaring only his salaries fromthe ElectricityAuthorityand hiscompany. Onthe25thMay, 1983 he was served with a notice to pay the tax in dispute amountingtolUUb.bbwhich he did. 40 1958 3 C.L.R. Leonlda v.Republic A.Lolzou J. The applicant's return of income for the year 1982 was submitted on the 28th April 1983 and he declared again that his only income was derived from the family company. On the 25th May 1983,he wasassessed for 1982 byaddingto thisincome an 5 amount of £12,459 by way of interest. An objection against this assessment was made on the 28th June 1983,on the ground that hisincome waslowerthan that assessed.Onthe 10thJune 1983, the respondent Commissioner addressed a letter to the applicant requesting him tosubmit the following information for settlement 10 of hisincome tax liability (Appendix«E»). «(i)Acapital statement showing hisown, hiswife's and his dependentchildren'sassetsandliabilitiesasat31st December 1982. 15 20 (ii)Certificate from Armonia EstatesLtdgivingdetailsofhis account with that company, includingtheamounts of interest paid or credited to him on the balance due to him from the saleof certain immovable property. (iii)Copies of the vending agreement regarding the saleof certain properties including any supplementary contracts varyingthe original vending agreements. (iv)Copy ofthe Bond and/or Mortgageagreementthat has been effected for the settlement of the debt due to him from the saleof hisproperties. (v)Copy of his and his wife's bank accounts for 1979 and 25 1980. (vi)Certain other particulars.» On the 9th July 1983, the applicant submitted through his accountant Mr. George Avraamides the particulars requested including a number of documents, copies of which have been 30 produced asAppendices «F»to«J». Therespondent Commissionerafter consideringthe particulars and evidence submitted, including the accounts of Andros and BrothersHotelsApartments Ltd.,decided thattheinterestpaidby Armonia Estates Ltd., relatingtothe acquisition ofthe applicant's 35 propertiescovered bytheagreementsearlierreferred tocouldnot be considered as income of the company as declared in the accounts fortheyears 1980onwardsbut thattherelevant interest (see paragraph 9, of the opposition), legally formed part of the income of the applicant on the following grounds: 1959 A.LolzouJ. Leonid*v.Republic
(1987)(
  1. a)The interest was payable to the applicant himself as provided by the contracts of sale and the mortgage loan signedbetween himself and ArmoniaEstatesLtd. (
  2. b)The minutes of the board of directors of Andros and Brothers Hotel Apartments Co. Ltd. dated the 3rd January 5 1980, had no legaleffect asadeed ofassignment oftherights oftheapplicant arisingoutofthespecificvending agreements and/or mortgage loansexistingwithArmoniaEstatesLtd.and did not bind Armonia Estates Ltd.since the debtor company (Armonia Estates Ltd.) was not a party to any legal deed of 10 assignment. (
  3. c)There was no official transfer of the mortgage loan in favour ofAndrosandBrothersHotelApartmentsCo.Ltd.The relevant mortgage which was registered in the books of the Paphos Land Registry Office under No. 943/79 on 13th 15 October, 1979, was and remained in favour of the applicant until itsfinal settlement in 1982. The respondent Commissioner revised the Income Tax Computation submitted withtheaccountsofAndrosand Brothers Hotel Appartments Co Ltd., and deducted therefrom the interest 20 included as received from Armonia Estates Ltd.The revision with copytothecompanywasnotified tothecompany'saccountantby letter dated 7th September 1985 (Appendix«K»). The amounts of interest involved are the following: Year1980: Bankinterest Year 1981: Interestfrom Armonia EstatesLtd. Year 1982: Interest from Armonia EstatesLtd. Totalincomededucted from company'scomputations: £483 25 £10,025 £12,439 £22,947 The respondent Commissioner explained to the applicant and 30 his accountant at the various meetings which took place at the Income Tax Office Paphos the reasons for which he decided to assessthe applicant withthe interestpaid byArmonia EstatesLtd. but no agreement couldbe reached onthispoint.The applicant's objections against the income tax assessments for the years 1979 35 to 1982were determined by therespondent who communicated hisdecision to him on the 7th September 1985together with the relevant Notices of Assessment. (Appendices «L», «O»). 1960 3C.L.R. Leonidav.Republic A.LolzouJ. The amounts of interest asfinally assessed on the applicant are based on a certificate dated the 10th July 1985,obtained by the respondent Commissioner from Armonia Estates Ltd., (Appendices «P»,«Q»and «R>). They are as follows: 5 10 Contract Year 1979 1980 1981 1982 A B C £5,500 £192 3,682 7,720 3,287 2,113 - £2.012 2,100 1,730 Total £5,692 13.384 7.500 1.730 £12,439 £10.025 £5.842 £28.306 In the notice of opposition there are set out the relevant Laws andsection thereof underwhichtheassessmentsinquestion were raised and I need notreproduce them hereasthe question which has to be decided is whether the interest which was due to the 15 applicant from Armonia Estates Ltd., under the mortgage agreement which was collected instead by Andros and Brother? Hotel Apartments Co. Ltd.. byvirtueof theagreement ofthe3rr, January, 1980,(AppendixD).shouldbecharged totheapplicant's chargeable income. 20 25 .30 It is therefore necessary to examine the legal effect of tl · agreement of the 3rd January but before doing so. the full text c " the document inquestion which hastobe set out herein: «MINUTESOFTHEMEETING OFTHECOMPANY ANDROSANDBROTHERS HOTEL APARTMENTS LIMITED DATEDTHE3rdJANUARY 1980 PRESENT: Chnstodoulos Leonida, Demetra Chr. Leonida, AndreasChristodoulou, and Liza Christodoulou SUBJECT: Assignment to the Company by Christodoulos Leonida of his rights on a debt of ARMONIA ESTATESLtd., tohim. 1961 A.Lolzou J. Leonida v. Republic
(1987)WHEREAS Christodoulos Leonida one of the shareholders has to receive a substantial amount fromARMONIAESTATESLtd.,and WHEREASthe Company isinneed of financial resourcesforitsbuildingworks,BYTHIS, Christodoulos Leonida offered to assign to the Companythewholeamounthehastoreceivefrom ARMONIAESTATESLtd. • The meeting accepted the offer of ChristodoulosLeonidaanddecidesthat: 5 10 (
  1. a)Any receipt from ARMONIA ESTATES be deposited in the name of the company with the BankofCyprus. (
  2. b)Any amount of interest of the debt of ARMONIAESTATESbedeemedasincomeofthe 15 Company,and (c)Everysocollectedsumbe keptinaseparate accountandadecisionbetakenatanewmeetingas toitstransfer toitsShareCapitalorotherwise. 20 Paphos3/1/1980 (Sgd.)Bythefourpersonspresent.» Itisthecasefortheapplicantthattheaforesaiddescribedasthe written agreement datedthe3rdJanuary, 1980is,inallrespects legal and that the stand of the respondent Commissioner to be found inparagraph 9 a,b,and c,of theOpposition reproduced 25 hereinabove as paragraphs (a), (
  3. b)and (
  4. c)as notified to the applicantbyhisletterdatedthe7thFebruary,(AppendixK)isnot warrantedbytheLaw. Thesaid agreementwasmade bytheapplicantwhoassigned therebyhisrightsfromthewrittenagreementsofthe15thJanuary, 30 1980,(Appendix5and6)tohiswifeandhischildrengratisforthe establishment of Andros and Brothers Hotel Apartments Co. Limitedwhich wasnotatthetimeregistered inaccordancewith the Law. Furthermore the allegation contained in paragraph (
  5. b)cannot stand as Armonia Estates Limited was not made a 35 contractingpartytotheagreementofthe3rdJanuary1980.More so,astheContractLawCap.149clearlydefineswhenacontract isvalid orvoid, and the agreement inquestion isinall respects valid. 1962 3 C.L.R. Leonida v. Republic A. Lolzou J. Furthermore, the contents of paragraph (
  6. c)above cannot support the view that the said agreement is not valid if the mortgage under No. 943/79, dated 13th October 1979, in the name of the applicant still remained in force as thatis a different 5 matterfrom thevalidity of the agreement The points raised are not devoid of authority In the case of Kitromelides ν The Republic
(1973)3 C LR 123 ρ 134, Hadjianastassiou, J , had this to say 10 15 20 25 30 35 «The way aperson chooses tospend orapply hisincomeis not matenal for income tax purposes, even if such expenditure isnecessitated by law orby a contract andno deduction isallowable eitherfor thepurpose ofassessment or for thepurpose of computing totalincome from allsourcesin respect of any such application » The same view was expressed in Perkins Executors ν The Commissioner of InlandRevenue, 14ΤX 851 by RowlattJ •It seems to me that the question - Ithink the Solicitor General agreed with me - as a question can be stated ven clearly If a person has alienated his income so that it is no longer his income he is not supertaxed upon it, but if }e merely applies the income so that itpasses through him a .d goes on to an ultenor purpose, even although he may I obliged todo so, still thatremains his income > The pnnciple laid down in Perkins case was adopted Hid followed intheciaseofChansGeorghalhdes. 23C LR 249, where as regards the issue as to whether the transaction in that case amounted underthe then in force IncomeTax Law. Cap 297. to an effective disposition or alienation, or absolute assignment of income, or merely to a charge or application of income,Zekia J said atρ 257 «The transaction in question amounts to nothing elsethan to an undertaking by theson topay tohis mothertheportion of rent collected by the former according to the terms of the contract The creation of acharge onthisparticularincomeof the appellant has been intended There is no pnvity of contract between the tenants and the mother There is no absolute assignment of future rentsorpart thereof Doesthis agreement have theeffect of aneffective disposition of partof the incomeof theappellant so as toentitle himnottoinclude 1963 A. Lolzou J. Leonida v. Republic
(1987)this sum in his chargeable income or, inthe alternative, does it entitle him to a claim of a deduction for an equivalent amount from his income? We have tofallbacktothegeneral law andfind outwhether the purported transfer of income is effective enough to pass 5 property in the income to the disponee, ιe covenantee or trustee Inotherwords, theremustbe analienationof income so that the seller or covenantor might say that a particular income is no more his A disposition short of an alienationin our view is not sufficient for shifting the liability topay tax on 10 somebody else Adisposition for instance which only creates a charge on a particular income or in effect does not go beyond a contractual obligation on the part of a promisor to hand over partof theincomehecollects from adefinite source could notbe considered an effective disposition oralienation 15 of income for the purpose of the IncomeTax Law Thisview denves some support by the following provisions akin to section 50
(3)of IncomeTax Law (Sections392,393,395and 397 of theIncomeTax Act, 1952) They relate to dispositions made by the disponor, the owner of income,in favour of his 20 minor childrenanddisposition infavour of persons generally, for penods which cannotexceed six years » The agreement of the 3rd January 1980 is in effect an undertaking orarrangementmadeinthepresentcasebetween the applicant and his company Andros Brothers Hotel Apartments 25 Co Ltd ,for no consideration and with Armonia Estates Ltd , not a party to it, hence it could not be binding in law Assuming however, the said arrangement to be binding as between the applicant and his company the interest inquestion should never­ theless be charged to his chargeable income because undersuch 30 arrangement the property in the interest did not pass to the applicant's private family company the mortgage in question continued tobe intheapplicant'sfavour untilitsfinal settlementin 1982, and he had exclusive nghtto theinterest accruing from the debt due to him by Armonia Estates Ltd , the latter being 35 answerable inlaw only tohim for the payment of such interest In fact and in law the arrangement was not an effective disposition or alienation or absolute assignment for income tax purposes as it did not go beyond the maximum of a contractual obligation on the part of the applicant to hand over to his family 40 Company the interest to which he was entitled The applicant 1964 A. LolzouJ . Leonida v. Republic A · L o b o uJ. cannot say that the interest in question is no longer his, as the purported transfer ofthe income wasnoteffective enough topass properly in the income to the disponee. nor did it transfer to the family Company a legal or equitable interest or share in the 5 incomederived from themortgage.Therefore. tri2Commissioner rightly charged thissum tothe applicant's chargeable income. The position being so, I need not proceed to expound the position of assignment atCommon Law and Equity inCyprus. For all the above reasons the Commissioner's decision was 10 reasonably open to him and correct in law and therefore, the recourse should be and is hereby dismissed, and the sub judice decision confirmed in whole under Article 146
(4)(a) of the Constitution. Inthecircumstances however, therewillbe noorder astocosts. 15 Recourse dismissed. No order asto costs. 1965

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