clr/1987/1987_3_607.pdf

(1986)3 C L R 1755) on the ground that the amount ο 25 £15,000 was capitalinvested inanother enterpnse outsidethe usual courseof 607 Georghiou v. Republic

(1987)of appellant's profession and, therefore, not an expense wholly and exclusively incurred for the production of appellant s income from his profession Hence the present appeal Counsel for theappellant argued thatthe word «profession, in section 1 l(l)(c) of the IncomeTax Laws, 1961-1977 gives a different context to this provision as compared with the corresponding provisions in the English Tax Legislation and that the tnalJudge wrongly did not decide the case within the ambit of section 15 of the IncomeTax Laws 1961-1979 5 Held,dismissing theappeal (A)PerA Loizou,J , Malachtos,Sawides and 10 Kourns, JJ concurring

(1)On the authorities as they stand the general pnnciple is that «nosum can be deducted in respect of any loss which isnot connected with or does notanse out of the trade Aloss thatis incurred ina transaction entered into for thepurpose of earning the profits of the trade is permissible deduction the question whether many particular case theloss 1 5 arose out of, or m connection with the trade is a question of fact» (Simon's Taxes, 3 Edition Vol β page 630 para BI 1305) {'DI"hepresence of the word «profession» insection 11(0(c)*of theIncome Tax Laws, 1961-1977 does not help the appellant inasmuch as the «Bad Debt· eligible for deduction must have been incurred in respect of the 2 0 profession of the taxpayer andnot independently of it Itisas m thecase ofa «baddebt» of atrader which mustbe connected with his trade The matenal words in the section are «incurred in any» which means in respect of orin connection with «trade, business or profession» In this case the appellant has notlost his money as a result of theexercise of hisprofession 25

(3)Section 15 authorises thecarrying forward and the setting off of a loss incurred inone year against thetaxpayer s incomefor subsequent years until such lossisexhausted ifitcannotbe wholly set off against theperson's income from othersources for thatyear ofassessment Itdoes notauthonseanyother deductions and it does not introduce any additional allowance other than trading losses 30

(4)As it clearly emerges from the authonties a professional man can maintain thata loss in respect of money lent is deductible incomputingthe profits of his profession only ifthere isan express finding totheeffect thatthe loss was incurred in the course of carrying on his profession Itseems thata 3 5 similar finding is necessary mrelation toany otherkindof business in respect of which the lending of money isnotgenerally accepted as being apart

(5)Inthelight of theabove reasons thisappeal has tobe dismissed B)PerPikis,J (I)Mererecitationofsection 13(d)*of theIncomeTax Laws, invoked by counsel for the appellant in support of the proposition that the 4 0 amount of £15,000 could be appropriately regarded asloss of trading stock, 'Quotedatpp 611-612post ** Therelevantpartisquoted atρ 615post 608 Georghiouv. Republic 3 C.L.R. shows theuntenability of such argument 5 10

(2)The pertinent question upon which the outcome of this appeal rests is therelationshipornexus thatmustexistbetween thebad debtscontemplated ins 11

(1)(c)andtheincomefromwhich itissought todeductthem Likeother deductible outgoings and expenditure the bad debts must have been incurredintheincomeearning process oftheappellant They mustanseinthe course of the trade or business and be incidental thereto The section isnot designed to afford relief trom losses incurred from investments unless such investments are madeinthecourseof an investment business Likewiseabad debt ansing from aloan canonlybe deducted ifmoneylending isthe business wholly orpartly of thetaxpayer Theobject of s 11

(1)(c) istoputbad debtsin pan materiawith outgoings andexpenses wholly andexclusivelyincurred for the productionof theincome

(3)Inthe light of theaforesaid pnnciples thisappeal should be dismissed *3 Appealdismissed No orderas to costs Casesreferredto AlliedNewspaper Ltd ν Hmdsley [1973]4All ΕR 677 OdhamsPress Ltd ν Cook [1940]3 All ΕR 15 20 HadjiPavlou and Sons ν TheRepublic

(1967)3 C LR 711 ReidsBreweryCompany ν Male 3 ΤC 279 Sroff ν Hoddmott 7 ΤC 85 Rutherfordν IR Comrs 23 ΤC 8 Bury and Walkersν Philips32 ΤC 198 25 Appeal. Appeal against thejudgment of Judge of the Supreme Courtof Cyprus (Demetnades, J ) given on the 18th October 1986 (Revisional Junsdiction Case No 26/81)* whereby appellant's recourse against the decision of the respondents to treat the sum 30 of £15,000 - lentby applicanttoThassos MotelsLtd ascapitalloss andtorefuse itsbeing setoff againstapplicant'sincomefortheyear 1975-1977 was dismissed L Papaphihppou, for the appellant 35 A Evangelou, Senior Counsel of the Republic, for the respondent C u F deponed,η (1986} 3 CLR 1755 609 a d v """ Georghiou v. Republic

(1987)A LOIZOUJ The Court has unanimously concluded that this appeal should be dismissed Thereasonsthat ledmylearned Brethren Malachtos, Sawides Koumsand myselftothisresultarethefollowing JusticePikis will be delivenng htsown reasons The appellant who comes from Famagusta was the Senior Officer in charge of the Famagusta Branch of Russel and Co , Chartered Accountants Heleft that service in 1973andstarted on htsown practicing hisprofession asaccountant and auditorinthat town At the same time he took up the management of the 10 «Rebecca» Hotel inFamagusta which wasthe property ofThassos Motels Ltd The shareholders of this company are the appellant and hisbrother, each having £20,000 shares Asthe company needed more money to run itshotel business, the appellant lenttoit£50,000,theproceeds ofthesaleofaflathe 15 owned Hisbrother advanced another £35 000 Theadvance was to yield 8% interest Asa result of the Turkish invasion and the occupation of Famagusta town bytheTurkish troops on the 14th August 1974 theproperty owned bythesaid Company remained behind inFamagusta, whilsttheappellant andhisfamily movedto 20 Nicosia,where sincethe 1stApnl 1975isemployed asaccountant with Messrs Costas Sidens and Sons Ltd The respondent Commissioner of income-Tax raised assessments on the appellant for the years of income 1975 and 1976 to which the appellant objected claiming relief for losses 25 suffered by him in Famagusta, one being the amount of £15,000 advanced to the company The respondent byhisletterdated the 19th November 1980 rejected the claim of the appellant on the ground that the amount of £50,000 was a capital lossand not an expense wholly and exclusively incurred in the production of 30 income That decision was challenged by the appellant by a recourse which was heard in the first instance by a Judge of this Courtwhodismissedsamebyhisjudgment inwhichhe concluded as follows «To my mind, the amount lent by the applicant to the 35 company was capital invested in another enterpnse outside the usual course of the applicant's profession It was, therefore, not an exxpense wholly and exclusively incurred for the production of the income of the applicant in his profession and for thisreason I dismissthe recourse » 40 As against that judgment the present appeal was hied, the , 610 5 3 C.L.R. Georghiou v. Republic A. Lotzou J. grounds of which are the following «1 The Tnal Judge wrongly did notdecide the case within theambitof section 15of theIncome-TaxLaws 1961 to 1979 and/or misinterpreted the provisions of thesaid section 5 2 The claim for allowing deductions for theamountof the loan was notmade ontheground thatthelossof thisamount was abad debt in relation tothe exercise of his profession as an accountant nor that itwas an expense for theproduction of profit (section 11)» 10 We have had the advantage of elaborate argument by learned counsel onbothsides andwe have cometotheconclusion thaton the authorities as they stand and which in a concise form are set out in Simon's Taxes 3rd Edition. Volume Β ρ 630 paragraph Bl 1305, the general principle is that«no sum can be deducted in 15 respect of any losswhich is not connected with or does not arise outof thetrade Alossthatisincurredinatransactionenteredinto for the purpose of earning theprofits of the trade is a permissible deduction the question whether in any particular case the loss arose outof, orinconnectionwith thetrade isaquestion of fact» 20 In respect of this latter proposition the authonties given are Allied Newspaper, Ltd. ν Hindsley (1973] 4 All ΕR 677 OdhamsPressLtd ν Coo/i[1940]3AllE R 15 2 3 T C 233 H L Section 11 of theIncome-TaxLaws 1961-1977-and23 confine thereference tothese Laws astheywere theonesapplicable inthe 25 present case in so far as relevant reads as follows«11 -

(1)For the purpose of ascertaining the chargeable income of any person there shall be deducted all outgoings and expenses wholly andexclusively incurredby such person in theproductionof the income including30 35 (c)bad debts incurred in any trade business, profession or vocation proved to the satisfaction of the Commissioner to have become bad debts dunng the year immediately preceding the year of assessment and actually wntten off dunng the same year notwithstanding that such bad debts were due and payable pnortothecommencementof thesaid year, and also the amount of any specific provision for the doubtful debts in respect of which the Commissioner is satisfied that they have or will eventually become 611 A. Loizou J. Georghlou v. Republic

(1987)irrecoverable Provided that all sums recovered during the said year on account of amounts previously wntten off or allowed in respect of bad debts under theprovisions of any previous law imposing tax on income or under the provisions of any lav\ 5 enacted by a Communal Chamber and imposing a personal tax in the form of income tax, or under the provisions of this Law shall, for the purposes of this Law be treated as receipts of the trade,business, profession or vocation for thatyear » Section 13 on the other hand deals with deductions which 10 cannot be allowed and by paragraph (e)thereof it prohibits such deductions in the cases of disbursements or expenses not being money wholly and exclusively laid out or expended for the purpose ot acquiring the income And thesame under paragraph (

1. f)thereof regarding capital withdrawn or any sum employed or 15 intended tobe employed as capital Ithas been argued by learned counsel for theappellant thatthe presence of the word «profession» (επάγγελμα) in section ll(l)(
2. c)of the Law gives a different context to this provision as compared with the corresponding provisions of the English Laws 20 We do not intend to enter into an analysis of the numerous provisions in the English Tax Legislation and the various rules applicable to the different Schedules in view of the clanty of the wording of own section In our view the presence of this category inaddition tothe rest, 25 included therein, does not give any assistance to the case of the appellant inasmuch as the«bad debt» eligible for deduction must have been incurredinrespect of theprofession of thetaxpayer and not independently of it This is as in the case of a «bad debt» of a trader which must be connectedwith histrade Inourcase theloan 30 which issought tobe deducted as alosswas notadebt incurred by theappellant inrelationtohisprofession, thematenalwords ofthe section being «incurred in any» which means in respect of or in connection with «trade, business, etc ,or profession» with which latter category we are here concerned The appellant being an 35 accountantand notamoney lenderandnothaving lost his money as a result of the exercise of his profession as anaccountant It was as such that the respondent Commissioner considered him and we find that that was reasonably open to htm in determining that question of fact 612 40 3 CX-R· Georghiou v. Republic A. Lolzou J . As regards the second argument of learned counsel for the appellant in respect of section 15 this section authorises in our view the carrying forward and the setting off of a loss incurred in one year against the taxpayer's income for subsequent years 5 until such loss is exhausted if it cannot be wholly set off against the person's income from other sources for that year of assessment it does not authonse any other deductions and it does not introduce any additional allowances other than trading losses Relevant in this respect is the case of 10 Hadjpavlou and Sons ν The Republic

(1967)3 CLR ρ 711 in which it was held that what was meant to be conveyed by the notion of losses in section 15

(1)is a trading loss and not a capital one The nature of the disputed payment in this case is that it was 15 not connected with nor did it arise out of the trade carried out by the appellant who was at the time practising his profession of accountant and auditor The case of Reid's Btewery Company ν Male, 3 Τ C 279 and the other cases given in Simon's Taxes (supra), bear out the proposition that no sum 20 canbe deductedinrespectof anyloss which isnotconnected with or does not arise out of the trading of thetaxpayer and thetrade would mean in this case, wholly or partly that of the lending of money It is worth refemng here indicatively to some of the relevant 25 cases, beanng always in mind that the application of the pnnciple depends on the particular facts of each case In Stott ν Hoddmott, 7 Τ C 85, an architect, in order to obtain business, took up shares in the companies granting the contracts, and subsequently sold the shares at a loss The sale 30 of the shares was necessary in order to provide the respondent with funds for purchasing other shares with a view to obtaining other contracts It was held the loss in question was a loss of capital, and was, therefore not deductibe In Rutherford v. IR. Comrs, 23 Τ C 8 a firm of Wnters to 35 the Signet also acted as factors, insurance agents and stockbrokers, and although they did not hold themselves out as financiers or moneylenders, they were in the habit of making advances to clients. These loans had always ansen directly out of their legal or other business The firm claimed to be entitled 40 to deduct a sum representing the losses sustained in connection with loans made to two clients for the purchase of. 613 \, Lolzou J. Georghiou v. Republic

(1987)in the one case, farm stock, and. in the other, a farm. There was no proof that it was a custom of solicitors or Writers to the Signet generally to lend money to clients, but the firm contended that theirs was a composite business, including the lending of money, and that the sum in question was, therefore, 5 a proper deduction. It was held that the losses were not connected with the firm's activities and were therefore not deductible. In another case, Bury and Walkers v. Philips, 32 T.C. 198, no allowance was made for a loss on a loan to a builder by a 10 firm of solicitors who had made-a practice of advancing money for the purchases of land for housebuilding to builders who were usually, but not always, clients of the firm. No evidence was given of any practice among solicitors of making loans as a part of their business, and the firm were not successful in 15 their contention that a separate trade of money lending was carried on and combined with their profession as solicitors. Itisreasonablyclearfromthesecasesthataprofessional mancan maintain that a loss in respect of money lent is deductible in computing the profits of his profession only if there is an 20 express finding to the effect that the loss was incurred in the course of carrying on his profession. A similar express finding would also be necessary, it seems, in relation to any other kind of business in respect of which the lending of money is not generally accepted as being a part. 25 For all the above reasons this appeal is, as we have already said, unanimously dismissed but in the circumstances there will be no order as to costs. PIKIS J.: At the core of this appeal lies the interpretation of s.ll(l)(c)* with a view to establishing the range of its 30 application, particularly the nexus that must exist between bad debts and the income from which it is sought to deduct them. Applicant, a professional accountant in salaried employment, claimed a right to deduct from the computation of his chargeable income for the years 1975-1977, an amount of 35 £15,000.- lent or used to buy shares in a family property company at Famagusta. The shareholders of the company were his brother and sister-in-law, himself being a minority *IncomeTax Law 614 3 CL.R. Georghlou v. Republic Pikis J. shareholder The loan was made before 1974 at a time when the appellant resided in Famagusta and practised accountancy on his own The Commissioner rejected the claim for a deduction on the 5 ground that the loss did not represent anything in the nature of an expense incurred wholly and exclusively for the production of the income from which it was sought to deduct the debt The learned trial Judge upheld the decision and dismissed the recourse Also he doubted the irrecoverability of the debt 10 considenng that the town of Famagusta where the property is situate «is at present under Turkish occupation», adding this is a fact that would not at present «lead to the conclusion that the amount of £15.000 -lent by the applicant to the company will never be recovered » The learned trial Judge noted that 15 the debt for which deduction was sought was not a trading debt and as such could not be deducted from the chargeable income of the appellant Counsel for the appellant argued that the ambit of s ll(l)(c) is far wider than depicted by the tnal Court and argued that its 20 provisions cover bad debts incurred in any business context He drew attention to the fact that the loan made to the family company at Famagusta was not an isolate investment but part of a senes of investments made by the appellant The other investments were shares in a coffee processing company and a 25 deposit in a Bank Therefore, the income of the applicant did not denve solely from his professional earnings but from his investment business as well that he earned on side by side with his profession Also he invoked, with less enthusiasm it ..iust be said, the provisions of s 13(d) in support of the claim for 30 deduction, repeating the argument raised before the tnal Court that the loss of the amount of £15,000 - could appropnately be regarded as loss of trading stock Mere recitation of the provisions of s 13(d) exposes the untenability of this argument It provides that deduction shall be allowed in respect of. inter 35 alia, «the cost pnce of any goods taken out of the business for the use of the propnetor or any partner or the family of such propnetor or partner» No more need be said about the inapplicability of this provision of the law The other ground upon which the decision was challenged 40 was founded on the provisions of s 15 Counsel argued it isan omnibus provision permitting the deduction of losses however 615 Plltis J . Georghiouv. Republic

(1987)incurred by the tax-peyer In reply counsel for the Republic submitted s 15 does not add to the list of allowable deductions for losses, but merely provides that losses otherwise deductible may be deducted not only from the chargeable income of the year in which they were incurred but may be earned forward 5 and be deducted from the income of subsequent years untilthe loss is exhausted The decision in Haggipavlu ν Republic*, counsel added, settles thattheambitof s 15 is confined totrading losses Iwholly agree that s 15 is a regulatory provision solely designed to lay down that trading losses may be earned forward 10 untilthelossisexhausted Itdoes notinanyway extend therange of deductible losses We turn back to examine the applicability of the provisions of s ll(l)(

1. c)to the facts of the case The answer of counsel of the Republic to the submissions of appellant is that the 15 deductions allowed under this enactment are confined to trading debts The effect of this provision of the law is accurately summed up in Simons Taxes**by reference to the provisions of corresponding English legislation Itis depicted as follows «Nosum can be deducted in respect of any loss which 20 is not connected with or does not anse out of the trade» Further down it is noted thatwhether a particular loss arose out of or in connection with the trade is question of fact A deduction for lost loans, it is explained in Simon's, « can be obtained only if the trade is one consisting wholly or partly 25 of the lending of money in that way If the loan was a transaction outside the scope of the trade on the other hand, and the loan is lost, no deduction in respect of it is admissible» These propositions are fully bom out by the ratio of numerous decisions on the interpretation of corresponding English 30 provisions*** Inaccordancewiths 13(e),counsel reminded,only disbursements and expenses wholly and exclusively incurred for the purpose of acqmnng the income are deductible Mr Papaphilippou doubted the relevance of English case law as an aid to the interpretation of s ll(l)(
2. c)for the reason 35 that corresponding English statutory provisions do not refer to business losses as such, as a legitimate ground of deductibility '

(1967)3 CLR 711 " Vol 13 3rd ed pages 630 631 632 •"TA 1970 s 130(e)ands519

(1)and

(2)616 3 C.L.R. Georghiou v. Republic Pllds J. The pertinent question upon which the outcome of this appeal rests is the relationship or nexus that must exist between the bad debts contemplated in s. ll(l)(

1. c)and the income from which it is sought to deduct them. Like other deductible 5 outgoings and expenditure, the bad debts must have been incurred in the income earning process of the appellant. They must, as accurately stated in Simon's, arise in the course of the trade or business and be incidental thereto. The section is not designed to afford relief from losses incurred from investments 10 unless such investments are made in the course of an investment business. Likewise a bad debt arising from a loan can only be deducted if money lending is the business wholly or partly of the taxpayer. The object of s.ll(l)(
2. c)is to put bad debts in pari materia with outgoings and expenses wholly and 15 exclusively incurred for the production of the income. This has only to be stated to demonstrate how untenable the claim of the appellant for deduction is.The loan was not made and had no connection or bearing with the income of the applicant from which it was sought to be deducted. The appeal must. 20 therefore, fail. This being the case it is unnecessary to examine whether the loan of £15,000.- can be regarded as permanently lost. In the result the appeal is dismissed. Appeal dismissed. No order as to costs. 25 617