clr/1987/1987_3_239.pdf

(1)(0—Donations— *Loss* in the sense of the proviso to the saidsection—Means "taxable loss» and not an"accountingloss»—Amountofdonationscorrectlydeducted from amount of taxablelossesto be earnedforward 5 10 , 15 Income tax—Accountancy pnnciples—Cannot ovemde .provisions of taxing statute Thequestion inthiscase iswhethertheway therespondent Commissioner applied section ll(l)(f) of the Income Tax Laws 1961-1981 when he deducted certain donations made by the applicant company in 1981 and 1983 from the company's taxable losses to be camed forward and set off against thecompany's future income was reasonably open tohim The proviso tothesaid section reads «Provided that,notwithstanding any provisions of thislaw tothecontrary,intheevent ofalossincurredintheyear in which such donation or contribution was made,any partof theloss up to tne amount of the donationor contribution shall notbe camed forward and shall notbe set off against theincome for subsequent years* Counsel for the applicant submitted, inter alia, thatthe word «loss*in the proviso cannotmean «taxableloss»,but «accounting loss» 20 Held,dismissingthe recourse

(1)Theprovisions ofataxing statutecannot be overridden by any well known pnnciples of accountancy

(2)The proviso to section 11

(1)(0 deals with losses that can be camed forward and set off against future income, as such they cannot be treated otherwise thanas «taxablelosses* Therespondentwas, therefore, entitledto 239 Elma Paper S a c k · v. Republic

(1987)deduct the donations from thetaxable lossestobe camed forward Recoursedismissed No orderas tocosts Casesreferredto Heather ν ΡΕ ConsultingGroupLtd [1979] 48 ΤC 293 5 Recourse. Recourse against the income tax assessments raised on applicant in respect of theyears 1981 -83 Κ Michaehdes, for the applicant. Υ Lazarou, for the respondent. «Λ Cur adv vult SAWIDES J read the following judgment. The applicant is a pnvate company of limited liability incorporated on 4 10 1968 Dunng the matenal time it derived its income from the manufacture and sale of paper sacks. The applicant submitted 15 returns and accounts, through its accountants,for theyears 1981, 1982 and 1983, which showed lossesas follows· Year 1981 £503,087 Year 1982 £278,371. Year 1983 £345,555. ^ The respondent Commissioner examined the accounts and computations for the said years as well as the accounts and computations for theyears 1977-1980which arenotthesubject of this recourse, and adjusted the computations by adding back certain amountswhich were notallowed for incometaxpurposes. 25 Such amendmentswerecommunicatedtotheapplicant'sauditors by letter dated 15.12.1984 On 12.1.1985 the respondentissued onginal assessments in accordance with the adjusted computations showing losses tocarry forward as follows: Year 1981 £493,473. Year 1982 £263,913. Year 1983 £331,405. 30 On 31.1985 the applicant's auditors in reply to the above assessments, wrote a letter to the respondent stating their 240 3 C.L.R. Eltna Paper Sacks v. Republic S a w t d e s J. disagreement to the respondent's decision to disallow certain items including the following which relate to the years subject matter of this recourse: (

1. a)Donations amounting to £10,996.- paid in 1981 and 5 £2,194.- paid in 1983 which were not allowed to form part of a losstobe carried forward invew of lossesinthe respective years. (
2. b)A 100% depreciation of electrical installations, allowing instead of normal depreciation in respect of the cost of such installations.The sums added back m thisrespect were £3,120 for 10 1981,£347.-for 1982 and £347.-for 1983. On the 24th January, 1985 the applicant's auditors filed a formal objection against theaforementioned assessment adopting the grounds stated intheirletter of 3.1.1985. The respondent having considered the applicant's objections, 15 decided to accept its claim for accelerated depreciation of electrical installations but did not accept its claim regarding the deduction of donations and contributions. This decision was communicated totheapplicant by letter dated8.2.1985 and final assessments were raised by therespondent,showing thelossesto 20 be carried forward as follows: Year 1981, £498,373.Year 1982, £268,466.Year 1983, £335,661.As a result, the applicant filed the present recourse, praying for 25 thefollowing relief: (A)A declaration thatthe IncomeTax assessments Nos 83/85/ 02/020,82/85/02/020,81/85/02/020d & d 8/2/85raised bythe respondentare nullandvoid and of noeffect whafeoever, and (B) a declaration that the decision of the respondent in 30 computing the losses for the years 1981-1983, not to carry over thelossarising outof thetwo donationsandcontributionsmadein 1981 and 1983, is nullandvoid and of noeffect whatsoever. The grounds of law on which the recourse is based, are the following: *> ι. The sub judice decision is contrary to section 1l(l)(
3. f)of the 241 S a w i d e s «J. Elma Paper Sacks v. Republic

(1987)Income Tax Laws 1961 -1983 and wrong in Law.

1. The respondent acted under a misconception of the law and the material facts.
2. The assessments complained of are arbitrary and legally as well as factually unfounded. The sole question in issuein the present recourse iswhether the decision of the respondent to deduct the donations made by the applicant in 1981 and 1983, to the amounts of £10,996 and £2,194 respectively, from the taxable losses to be carried forward and set off against the company's future income, was reasonably open to it. ,5 10 Section 11{1)(0of the IncomeTax Laws1961-1981provides as follows: 11.—

(1)Πρός εξεύρεσιν του φορολογητέου εισοδήματος παντός προσώπου θ α εκπίπτωνται άπασαι αι 15 δαπάναι ας τ ο τοιούτον πρόσωπον υπέστη εξ ολοκλήρου και αποκλειστικώς προς κτήσιν τ ο υ εισοδήματος. Εν αυταίς περιλαμβάνονται(στ) δωρεαί ή συνεισφοραί γενόμενοι δι' εκπαιδευτικούς, μορφωτικούς ή άλλους 20 φιλανθρωπικούς σκοπούς ττρος .τπ ν Δημοκρατίαν ή αρχήν τοπικής Διοικήσεως ή π;τος οιονδήποτε εν α υ τ ή φιλανθρωπικόν ίδρυμα εγκρινόμενον ως τοιούτον υπο τ ο υ Υπουργικού Συμβουλίου μέχρι ποσού είκοσι *** χιλιάδων λιρών και πεντήκοντα τοις εκατόν οιουδήποτε ποσού υπερβαίνοντος τας είκοσι χιλιάδας λίρας: Νοείται", ό τ ι , παρ' οιανδήποτε αντίθετον διάταξιν τ ο υ παρόντος Νόμου, εν περιπτώσει 30 ζημίας επισυμβάσης εντός τ ο υ έτους κατά τ ο οποίον εγένετο η δωρεά ή συνεισφορά, παν μέρος της ζημίας μέχρι τ ο υ ύψους τ ο υποσού της δωρεάς ή συνεισφοράς δεν θα μεταφέρηται και δεν θ α σ υ μ ψ η φ ί ζ η τ ά ι μετά τ ο υ εισοδήματος των 35 επομένων ετών: («11

(1)For the purposeof ascertainingthe chargeableincome 242 3 CL.R. D I M PaperSacksv.Republic Sawidea J. of any person there shall be deducted all outgoings and expenses wholly andexclusively incurred by such person intheproduction of theincome,including5 10. 15 (0 donations or contributions made for educational, culturalorothercharitable purposes totheRepublic or a local Authority ortoany charitable institutiontherein approved as such by theCouncilof Ministers uptothe amount of twenty thousand pounds and fifty per centum of any amount exceeding twenty thousand pounds: Provided that, notwithstanding any provisions of this Law tothecontrary, intheevent of a lossincuπed in theyear inwhich such donationorcontribution was made, any part of the loss up to the amount of the donation or contribution shall not be carried forward and shall not be set off against the income for subsequent years»). Counsel for theapplicant inhis written address contendedthat 20 the losses that had occurred were taxable losses and that taxable losses are losses that result after certain allowances such as depreciation andwear andtearallowances aretakenintoaccount under the relevant law. Such allowances do not represent expenses actually incurredby thecompany, but merely represent 25 a fictitious sum which the legislator considers fair to allow a company to deduct. He further submitted that the word «loss»in the proviso cannotmean «taxableloss»but «accounting loss». Counsel for the respondent submitted that under our fiscal legislation only one type of losscan be carried forward andset off 30 against the income of subsequent years, namely the losswhich is computed in accordance with the income tax provisions applicable inascertaining thechargeable income,which istheloss thatthe applicant properly named «taxableloss».«Loss», counsel added, under the provisions of our law, should be construed as 3 5 meaning «taxableloss»and not«accounting loss». It is well established that ircespective of any well known principles of accountancy, such principles cannot override the provisions of the taxing statutes. (See, Heather v.P.E. Consulting 243 S a w i d e s J. ElmaPaperSacks v.Republic

(1987)GroupLtd [1979]4 8 T C 293inwhichGouldingJ said,atp 313· «The general pnnciple seems, on the contrary, to be that, in determining what is capital expenditure and what is revenue expenditure in order to ascertain profits for tax purposes, the Court must follow ordinary pnnciples of commercial accountancy, save so far as modified by express statutory direction» 5 Bearing inmind theprovisionsofsection ll(l)(f) ofthe Income iax Laws 1961-1981, Iagree with the submission of counsel for the respondent that, in ascertaining the chargeable income, the 10 respondent correctly construed the provisions of the law as applicable to«taxableloss»and not«accountingloss» The proviso toparagraph (f)dealswithlosseswhichcanbecamedforward and set off against future income, as such, they cannot be treated otherwise than «taxable losses» The respondent, therefore, was 15 entitled to deduct such donations from the taxable losses to be carried forward In the result this recourse fails and is hereby dismissed with no order as tocosts Recourse dismissed 20 No orderasto costs 244