(1988)1988August29 [SAWTOES,J.] INTHEMATTEROFARTICLE146OFTHECONSTITUTION ETERIAMETAPHORONAYIANAPA(EMAN)LTD., Applicant, v. THEREPUBLICOFCYPRUS,THROUGH 1.THECOMMISSIONEROFINCOMETAX, 2.THEMINISTRYOFFINANCE, Respondents. (CaseNo.268/86). Taxation—Income Tax-Deductible expenses—TheIncome TaxLaws, 1961· 1981,sections11
(1),13(e)and(f)—Damagespaidtothirdpartiesfordamagestothe latters'vehiclescausedbytheapplicants'vehicles—Applicants engaged inthetransport business—Whether thesaidexpenses incurred whollyandexclusivelyintheproductionofincome—Question determined inthenegative—Therefore, theywerenotdeductible. 5 Taxation—Income Tax—Deductibleexpenses—TheIncome TaxLaws, 19611981,sections11
(1)and13(e)and(f)—Paymentbyapplicants,who were engagedinpublictransport,for acquiringa T " licence—Notanexpense whollyandexclusivelyincurredintheproductionofincome—Therefore, notdeductible. 10 Taxation—Income Tax—Deductible expenses—TheIncome TaxLaws 19611981,sections 11
(1)and13(e)and(f)—Expenseswhollyandexclusively incurredintheproductionofincome—Reviewofauthorities. Thefacts of thiscase,aswellasthepiinciplesevolvedtherefrom, are sufficiently indicatedbythehereinaboveheadnotes. Recourse dismissed with£100.-costsin favourofrespondents. 1640 ,c 3 C.L.R. EMAN Ltd.v.Republic ., Casesreferredto: / TheManufacturersLifeInsuranceCo:v. TheRepublic
(1961)3 C.L.R. ·, \ 4 6 0 ; i ., • • _ / . ' : StrongandCompanyofRomseyLtd.v. Woodifield, 5Tax Cases
- 5 Recourse. · < s • Recourse against theincometax assessments forthe.years of assessment 1981 and1982 and against the special contribution assessments for thequarters 1.1.81-31.12.82 raised on appli cants. ^ · . · • . ! ·.n-z. -.·.: : •» 10 A.Panayiotou, fortheapplicants. Y. Lazarou,fortherespondents. , - y . ;_ , Cur. adv.vult. 15 SAVVIDES J. read thefollowing judgment.-The present re courseisdirected against applicant'sincometax assessments for theyearofassessment 1981 and 1982 andalsoagainst the special 'contribution assessments for thequarters 1/81 to4/82 which were raised anddeterminedasshown inAppendixes "A".and,"B" at tachedtotheOpposition '• • j > ' · Theapplicantis aprivatelimitedcompanyengaged intransport
- a°ditsincomeatall materialtimestothepresentrecoursewasde rived from thetransportofpassengers andgoods. Theapplicant company submitted audited accountsfortheyear ended31.1.82 on 6.-11.82 through Mr.T.Qiristofides,. Certified Accountant, andfortheyear ended31._1.83 on30.5.84throughMr.E.Kalle25 nos. CharteredAccountant. ι *' The accountsof the company forthe year ended 31.1.80 to 31.12.83were examined andthecompany's auditorwas request edby the.respondentCommissionerofIncomeTaxby letterdated 1641 SawidesJ. EMAN Ltdv.Republic
(1988)2nd February, 1985 toproduce certain additional information. This information was supplied on the 29th April, 1985.Onthe basisoftheexaminationofthecompany'saccountsandtheadditional information received for theyearsof assessment 1979to 1983,assessmentswereraisedandsenttotheapplicantcompany 5 onthe3rdOctober,
- Thecompany'sauditorbyletterdated21stOctober, 1985 accepted theincometax and specialcontribution computationsas adjusted bytherespondent subject tothefollowing twomatters statedtherein: 10 (i)Yearofassessment 1981(Yearended31.1.82) Anobjection wasraised inthisrespect against anamountof £2,145.-claimedas"compensationpaidtovariouscarownersre accidentscausedbythecompany'svehicleswhichwerenotcovered byinsurance",which wasrejectedbytheCommissionerof 15 IncomeTax. (ii)Yearofassessment 1982(Yearended31.1.83) Anobjection wasraisedagainstthedeductionfromtheincome of an amount of £9,000.- beingthealleged cost of purchaseof "T"licences,whichwasalsorejected bytherespondent 20 Theobjectioncontainedintheaboveletteroftheapplicantwas rejected by therespondent whobyletterdated 18thNovember, 1985,informed theapplicant thatthetwoaforementioned items could notbeallowedforincometaxpurposesforthereasonthat (a)compensationpaidtothirdpersonsfordamagecausedarenot 25 expenses wholly andexclusively incurred for theacquisitionof incomeand,as such,they werenotdeductible; (b)any amount paid for thepurchaseof "T" licencesisnot allowed by lawand thatin anyeventsuchexpenditurecouldnotbeconsideredasan expenditurefortheacquisitionofincome. 30 Theapplicant'sauditorrepliedtotherespondentbyletterdated 1642 3 C.L.R. 5 10 15 .EMANLtd.v. Republic SawidesJ. 5th December, 1985,expressing his disagreement to the disal lowanceof theseconditemmentionedintheletterof therespon dentdated 18thNovember,,1985, thatis.concerning.theallowa bility of the.expenditure incurred for purchasing "T" licences without mentioninganything concerning thefirstitem contained insuchletter,thatis,thecompensationpayments tothirdparties. TherespondentCommissionerof IncomeTax,havingconsid eredtheobjection filed onbehalf,of theapplicantandbearing in mindall subsequent documentssubmitted by theapplicant's audi: tors,maintainedhisoriginal decision anddeterminedthe objec tion accordingly andinformed theapplicantof hisdecision bylet terdated22ndFebruary, 1986.As aresult,theapplicantfiledthe presentrecoursechallenging thesubjudice decision. Thesolequestion whichposes for considerationis whetherthe two items claimed by theapplicant,inparticular,theamountof £2,145.-paidascompensationtothirdpartiesfordamage caused totheircars by theCompany's.vehicles which werenotcovered by insurance, andthe amountof £9,000.- alleged to have been paidforthepurchaseof Τ licencesaredeductible expenses. 20 Counsel for the applicant submitted that the two aforesaid items aredeductible as they areexpenses incurredin the proper carrying outof thebusiness,ofthecompany andthattherespon dent,inrefusing todeductthem,actedarbitrarily andwithoutany legalorreasonablejustification., , 25 Counselfor therespondents,ontheother.hand,submitted.that suchclaimwas notdeductibleunder,theprovisions of sections11, and 13 of theIncomeTaxLaws 1961-1981 inthat, for ittobede ductible(a) itmustberevenueandnotcapitalexpenditure;(b) the expenditure was notincurredwhollydndexclusively for thepurposeof acquiring theincome. ' ' 30 . The;legal provisions relevant totheissuesunderconsideration. are contained.in sections 11 and 13 of the IncomeTax Laws 1961-
- Section 11
(1)deals with allowabledeductions and 1643 SawidesJ. EMANLtd.v.Republic
(1988)provides,interalia,thatinascertainingthechargeableincomeof any person there shall bededucted alloutgoings andexpenses whollyandexclusivelyincurredintheproductionoftheincome. This section, however, shouldbereadinconjunction with s.13 whichexpresslyprohibitscertaindeductions.Inparticular,para- 5 graph (e)tothissectionprovidesthattobedeductible,theexpendituremustbemoneywhollyandexclusivelysetoutorexpended for thepurposesof acquiring theincomeandparagraph (f)providesthatnodeductionshallbemadeonanycapitalwithdrawnor anysumemployedorintendedtotheemployedascapital. 10 Theexpression "forthepurposesofacquiringtheincome"has beenconsideredinthecaseofTheManufacturersLifeInsurance Co. v. TheRepublic
(1967)3C.L.R.460,in whichLoizou,J., after making reference to the caseof Strong and Company of RomseyLtd. v.Woodifield, 5TaxCases215,saidthefollowing 15 atp. 471: "Itclearly appearsfromtheabovecasesthatforapayment toqualify asadeductibleexpensefor incometaxpurposesit mustbeapaymentconnectedwiththetradeorbusinesscarried onandmadeinordertoenablethetax-payerthebettertocarry 20 onhistradeorbusinessforthepurposeofearningtheincome, whetherbygettingridofonerousserviceagreementsorforthe purposeofmaintainingahighstandardofbusiness." andconcluded bytreatingpaymentseffected bytheapplicant companyinthatcasetoagentsforthepurposeofcarryingonand 25 acquiringincomeinitsbusinessaspaymentswhichhadnotbeen made wholly and exclusively for the purpose of enabling the companytocarryonitsbusinessandearnincome. In Strongand Companyof Romesy Ltd. v. Woodifield (supra), towhichreference wasmadeintheabovedecision,itwas 30 held that damages and costs incurred by a brewing company, which also owned houses and carried on the business of innkeepers,onaccountofinjuriescausedtoagueststayingatoneof theirhousesbythefalling inofachimneywerenotdeductible 1644 3 C.L.R. EMAN Ltd.v.Republic Sawides J. for incometax purposes as they were notexpenses which were madefor the purposeofearningthe profits. LordDavey,indeli veringhis judgment,said the following,atp. 220: "It is not enough that the disbursement is made in the courseof, or arises outof, oris connectedwith,thetrade, or is madeoutof the profits of the trade.Itmustbemadeforthe purposeof earningthe profits." 5 10 On the basisof the materialbefore me and bearinginmindthe above,Ihave'cometothe conclusionthatthesepaymentscannot, in myview,be said tohave been madewholly andexclusively for the purposeof enabling thecompanytocarry onits business and acquireincome. • Irf'thecircumstances,Ithinkitwasreasonably opento the re spondentCommissionertocometo~the conclusionthat'triepay15 ments^in.question are,not^allowable.deductions for incometax * purposes and, therefore,I cannotinterferewith suchdecision. · ' 'IntHeresult,this'recourse fails'andis hereby dismissed with £100.-costs infavour of the'respohdents. '*'' '' '"' -Recourse·dismissed*with £ 100.costs infavourofrespondents. 20i Λ " .i t i i ' i ^ c - r j " ' - J V ' ;: J ''· ' t ·. ' · '- ' HZ " ' . U J ' ' - ' ' . J - b.'i ιι2>. ν "Λ, . Λ ^ > Λ·"5J ι;~Λ ' ' >• • η a-*· . .. '"' '•'/., jt}*> • " j f ' i ν . '.·-.' ..'J"*1 , ΐί ι-.... t · 'ι λ ν " ±r , Ί ' ί f,'· . '-.,ι " » '. ·ν :•·. ^Λ ci α>:·".- Ί _ ζ·. / "ΪΓ· 'ΓΓ^Κ t " u ·' ; Ϊ: Ι- α - , . > 'j - . . . i - - • ' . Γ ' - • . * w · " ^ · ,·",< ". ,·*ι - Ί > :a ι''L· _ .> "ι.··' . ' , ' ' • .Γ» -rivt t»V ' ι ' .· > ^ .ι ,' ι > '(ui* >ι ι'< <· ,:*J '~ ν j ·•: i f · - * - *" J > · •>ι - . . . J·* 1645