1987February 17 [PIKIS,J.) INTHEMATTEROFARTICLE146OFTHECONSTITUTION SHOEMEXLIMITED, Applicants, v. THEREPUBLICOFCYPRUS,THROUGH THEMINISTRYOFFINANCEAND/OR THECOMMISSIONER OFINCOMETAX, Respondents. (CaseNo. 261/86). IncomeTax—Deductions—Colour paintedby tax-payer isneversufficient to justifyadeduction—Paymentof£20,000byacompanylimitedtothewidow ofadeceaseddirectorandshareholderinappreciationofletter'sservices—A voluntarypaymentunconnectedwiththepoductionofapplicants'income— Moreover, inviewofitsnatureasavoluntarypayment, itsdeduction mom applicants'taxableincomeisprohibitedbys.13(k)oftheIncomeTaxLaws— Section8(g)ofthesaidlawscannotjustifyitsdeductionfromsuchincome. Recoursefor annulment—Practice—Costs—Principles governing exercise of Court'sdiscretion. Theapplicants,aprivatecompany,seeminglytomarktheirappreciationof theservicesofthelateGroutides,whodiedin1983,resolvedtogivehiswife. £20,000.Itmustbenotedmatfrom 18.1.80thedeceasedandhiswifewere thesoleshareholdersofthecompany.Theapplicantssoughttodeductthe aforesaid payment from their taxable income on two grounds, that isas paymentmadewhollyandexclusivelyfortheproductionofincomeandasa paymentdeductibleinvirrureofsection8(g)oftheIncomeTaxLaw. AstheCommissionerrejectedthesaidclaimfordeduction,theapplicants filedthepresentrecourse. Held,dismissingtherecourse:
(1)Thecolourinwhichfactsarepaintedby thetaxpayerIsneversufficienttojustifyadeduction.Anairofvery-similitude tofacts, whichmayground a deduction, isnever enough. Supposingthe applicantsovercamethehurdleofgoodfaith respectingthegenuinenessof thetransaction,thepaymentforwhichthedeductionwassoughtwasplainly avoluntaryoneinthenatureofagiftwhollyunconnectedwiththeproduction ofIncome.Moreover,asavoluntarypaymentlbdeductionwasprohibitedby s.l3<k)oftheIncomeTaxLaws.
(2)Section8(g),whichregulatestheliabilitytotaxorexemptionfromitof the recipients of retiring gratuity, commutation of pension and death 407 Shoemex Ltd v. Republic
(1987)gratuities,cannot supportthe deductionclaimed
(3)Whenever thefate of a recoursefor anndment is determinedby facts unveiled in the course of thejudicial inquiry, through examination of the administrativefiles, dismissal ofthe recoursewillnotentailanorderforcosts But when the facts, as known tothe applicant,cannot ground his case the Court mayintheexercise of itsdiscretion makeanorderforcosts 5 Recourse dismissed £75 -costs against applicants Casesreferredto Coates ν Amdale PropertiesLtd [1985] 1AllΕR 15, 10 Kowloon Stock Exchange ν IRComr [1985] 1All ΕR 205, Dollarν Lyon [1981] Ch D 333, Scott andIngham ν Treheame, 9ΤC 69, Copeman ν WilliamFordand Sons Ltd, 24ΤC 53, JubsonBros andCo ν CIR,U T C 147, 15 Coussoumides ν TheRepublic (\966)3 CLR 1, Fitikkidesv TheRepublic
(1973)3 C L R 15, Neocleousv TheRepublic
(1982)3 C LR 1435, Frangosand Others ν TheRepublic
(1982)3 C L R 53, Booksellers Associationν TheRepubhc{1985)3C LR 1171, 20 NakisBonded Warehouse ν TheRepublic
(1985)3 CLR 1179, Papadopoulos ν Municipalityof Nicosia
(1986)3 CLR 2046 Recourse. Recourse againstthe refusal of the respondents toaccept the sum of£20,000givenbytheapplicantcompanytothewifeofone 25 of itsshareholders,who hadpassedaway,as anappeciabonof the servicesrenderedbythe deceasedto the company,asapayment madeexclusivelyforthe productionofincomeand asapayment deductibleunderthe provisionsofsection8(g) ofthe Income Tax Laws. Chr. Kitromilides, forthe applicants. A. Evangelou, Senior Counsel of the Republic, for the respondents Cur.adv.vult 408 30 3C.L.R. ShoemexLtdv. Republic PIKIS J. read the following judgment. Shoemex Limited, a private company, seemingly to mark their appreciation of the services rendered to the company by Petros Groutides, who passed away in 1983, resolved to give his wife, a fellow 5 shareholderanddirector, thesumof£20,000. {TwentyThousand Cyprus Pounds only). From 18th January, 1980, the deceased and his wife were the sole shareholders of the company. In computingtheirtaxableincometheyclaimedarighttodeduct the amount of£20,000ona dualbasis.Primarily,asapayment made 10 wholly and exclusively for the production of income and, secondarily, as a payment deductible under the provisions of s.8(g)ofthe IncomeTaxLaws. The Commissioner rejected the claim and eventually raised an assessment without makinganyallowance forthepayment ofthe 15 aforementioned amount of money. Respondents disputed amenity tomake adeduction undereitherofthe twoheadsrelied upon by applicants;moreover, they questioned the genuineness of the payment and, generally, the bona fides of the applicants. Theychallenged applicantstoproducetheresolution authorising 20 thepayment, albeitwithoutsuccess. However imaginatively one views the payment to the wife, it cannot but be regarded as a gift made to her, unconnected with the trading and business activities of the company. Itwas for all purposes a voluntary payment, in no way associated with the 25 production of income.The suggestion that itwasmade with that end inmind,whollyoverlooksthe nature ofthe payment. Thecolourgiventoapaymentbythetaxpayer isnobasisfor a deduction unlessthefactsviewedinthecorrectperspective justify the deduction. Asobserved in Coates v.Amdale PropertiesLtd * 30 the colour inwhich facts arepainted isneversufficient tojustify a deduction;anairofvery-similitude,itwaspointedout,tofactsmat might ground an exemption is never enough. The facts surroundingthepaymentmustinsubstanceentitlethetaxpayerto claim exemption.The decision inKowloon Stock Exchange v.IR 35 Comr.**isto the same effect. Trade, it was indicated, primarily denotesoperationsofaCommercialcharacterordinarilyinvolving the supply of goods or services for reward. Counsel for the *(lse5]lABE.R.15(HU. -11985)1 ADE.R.205(PC). 409
(1987)respondents was nght insubmiung thatnotonlythepaymentdid not qualify as expenditure wholly and exclusively expended for the purpose of acquinng income, but as a voluntary paymentits deduction was specifically prohibitedby theprovisions ofs.13(
- k)EnglishcasescitedbyMr Evangelou*suggestthatpaymentmade 5 by the tax payer to members of the family or to a director of a company or on accountof loveand affection, are not generally regarded as payments made for business considerations Supposing applicants overcame the hurdle of good faith respecting the genuineness of the transaction, the payment for 10 which exemption was sought was plainly avoluntary one inthe natureofagiftunconnectedwiththeproductionoftheincomeof thecompany The alternative basis upon which exemption was claimed, namely s.8(g), is no less ill founded In the first place, s.8(
- g)15 purportstoregulate theliabilitytotaxorexemptionfrom itofthe recipients of retiring gratuity commutationof pension anddeath gratuities Ifagratuity orpension ispaidpursuanttoacontractual obligation itmay, in appropnate circumstances, be deducted by the company in the computation of their income as a payment 20 made for the discharge of a legal obligation. Nouseful purpose would be served by discussingfurther theambit of s.8(g)except noteitwas thesubject ofexaminationandanalysisinanumberof cases**. I conclude that s8(
- g)can, under no conceivable circumstances,support theexemptionclaimed. Intheend,I find 25 thecase for theapplicantstobewhollyunfounded Inproceedings foradministrativereviewcostsarenotawarded incidentallytotheoutcomeofthecase;theyareatlargeinviewof the inquisitive characterof theproceedings. Whenever thefateof the proceedings is determined by facts unveiled inthe course of 30 judicial inquiry, through examination of administrative files, dismissaloftherecoursewillnotordinanlyentailanorderforcosts incidentally thereto Ontheotherhand,where thematerial facts, • Dollarν Lyon[1981}Ch D333. ScottandIngham ν Treheame, 9 ΤC69; Copemanν WilliamFord&SonsLtd 24 ΤC53,JubsonBros&Co ν CIR.12TC 147 ••SeeCoussoumides ν Republic
(1966)3 CLR 1, 9; Rtikkides ν Republic
(1973)3 CLR15,Neodeousv Republic
(1986)3CLR1435 410 ShoemexLtdv.Republic PUd«J. asknowntotheapplicant,cannotgroundhiscase,theCourtmay, intheexerciseofitsdiscretion,makeanorderastocosts*.Andso Iproposetodointhiscase,adjudgingtheapplicantstopay£75.{SeventyFivePoundsonly)towardsthecostsofrespondents. Recoursedismissed. Applicantstopay£75.-costs S*e,trttvaBa,Rmgoeand0^m»v.RtpubBc
(1982)3C.LR,53;BookMUenAnod^ v. Republic
(1985)3 CLR. 1171; NaUs Bonded Warehouse v. Republic
(1985)3 C.LR. 1179,andPapadopouhsv.MunicipalityofNicosia
(1986)3C.L.R.2046. 411