3 C.L.R. 1988December30 [A.LOIZOU. P.] INTHEMATTER OF ARTICLE 146OFTHECONSTITUTION ΑΚΙΝΓΓΑ STEPHANOUIOANNIDE LTD., Applicants, v. THE REPUBLIC OF CUPRUS,THROUGH 1. THE MINISTER OF FINANCE, 2.THECOMMISSIONER OF INCOME TAX, Respondents. (Case No.258187). Taxation—Assessment and Collection of Taxes—TheAssessment andCollec tionof TaxesLaws 1978-1979, section 23(1}—Assessment raised after the lapse of 6years—Though invalid, itcannotbedisregarded in ascertaining whetheranactuallosshadbeenincurredintheyear inquestion—Otherwise thetaxpayer would havebeen entitled to carryforward andset off against hisincomeinsubsequentyearslossthatinrealityhadnotbeenincurred. Taxation—IncomeTax—Trading inland—Finding as to,bythe Commission erofIncome Tax—Judicialcontrol—Principlesapplicable. J Taxation—Incometax—Tradinginland—Aquestion of mixedlaw and fact— Thecriteria applicable inorder todeterminethequestion—Thecompany's objects andtheirimportance—Thesubject matterof thesaleinquestion(in this case landyielding neither income norpersonal enjoyment to theown er)—The length of theperiod of ownership (Five years elapsing between acquisition and sale of landheld to be a relatively short priod)—Whether thetaxpayerhasengagedinrepeatedtransactionsof asimilarnature. Thetwomain questions inthiscases were:(a)Whether'anassessment of incomemadeoutof time,i.e.after thelapseof six years,asprovidedby section23
(2)of theAssessmentand Collection of TaxesLaws 1978-1979, 2663 Akinita St. Ioannides v. Republic
(1988)canbedisregardedasfarastheactuallossincurredintheyearinquestion isconcerned,and(b)Whethertheprofit derivedbytheapplicantfrom the saleofaparticularpieceoflandwasjustifiably treatedasliabletoincome tax. Theprinciples expounded bytheCourt indetermining theaforesaid mattersappearsufficiendy from theheadnotehereinabove. 5 Recoursedismissed. Noorderastocosts. Casesreferredto: Georghiadesv.TheRepublic
(1982)3OLA.659; 10 HjiEraclisandAnotherv.TheRepublic
(1984)3C.L.R.604; AmaniEnterprises(Houses) Ltd, v. TheRepublic
(1985)3C.L.R. 198; RiverEstatesLtd. v.TheRepublic
(1986)3C.L.R.2575; CommissionersofTaxesv.MelbourneTrustLtd.[1914]A.C.1001; 15 ReesRoturboDevelopmentSyndicateLtd. v.Ducker, 13 T.C.366; Cooksey andBibbeyv.Rednall (H.M. Inspector of Taxes),30T.C. 514; CalifornianCopperSyndicate(LimitedandReduced)v. Harris,5T.C. 159; 20 Cayser,Irvine&Co.Ltd. v. IM.C, 24T.C. 491; Edwardsv.BairstowandHarrison, 36T.C.207; Snellv.Rosser Thomas &Co.Ltd., 44T.C. 343; Frazer v. IM.C, 24T.C. 498; I.R.C.v.Reinhold, 34T.C.389; Turnerv.Last[1965]42T.C. 517; 2664 25 3 C.L.R. Akinita St. Ioannides v. Republic Eamesv.StepnellPropertiesLtd.,43T.C.678; . Bolston & SonLtd. v.Farrelly, 34T.C. 161; , Pictfordv. Quirke, 13T.C. 251; RellimLtd. v.Vise [1951]32T.C. 254. f 5 Recourse. Recourse against the income tax assessments raised on applicantsfor theyears 1979and 1980. G.Triantafyllides,for theapplicants. Y.Lazarou, for therespondents. 10 Cur. adv. vult. 15 A. LOIZOU P. read the following judgment. By the present recourse the applicant Company challenges the income-tax assessments for theyearsofassessment 1979
(78)and 1980 which were raised and determined by the respondent Commissioner (AppendixA). Thefactsof thecasearebriefly these: 20 25 TheapplicantCompanyisaprivateCompanywithlimitedliability incorporated in 1969.Itsissued sharecapital atthematerial time was six-hundred sharesof onepound each. Its income was derived from interest, rents and as alleged by the respondent Commissioner,'profits from trading in land. It submitted its income-tax returns for the years"1979-
(78)and 1980 and the income-tax assessment for the years 1979-
(78)was for the profit derived from thesaleof aplotoflandof abuildingsiteunderplot No. 473, in Makedonitissa, Nicosia, by virtue of Section 5
(1)(a), 5
(1)(h), of the Income- Tax Laws 1961-1981.As regards· theyear 1980,therewas nochange inthe taxableincomeof that year,exceptthat therespondent Commissionerreduced theloss 2665 A.Loizou P. Akinita St.Ioannidesv.Republic
(1988)broughtforwardfrompreviousyearsfrom£572to£75. Ishallnotrefer atthisstagetotheacquisitionoftheimmovablepropertybytheapplicantCompanyandtheirdisposal,which transactions aresetoutinpartCoftheOpposition,asIshallbe referring tothosefacts totheextentthattheyarerelevantforthe 5 determination of the legal issues before me, laterin thisjudgment Learnedcounselonbothsidesagreethatthepointsinissueare thefollowing: (a)Whether the assessment for theyearof assessment 1979 10
(78)isoutoftime. (b)Whethertheapplicant Companycanbetreatedashaving tradedinlandorembarkeduponanadventureorconcern inthenatureoftrade. (c)Whether thedecision oftherespondent Commissioner to 15 increasetheincomedeclaredbytheapplicantCompanyfor theyear 1980by£497.-isjustified. Asregards the first issuelearned counsel for therespondent Commissioner conceded that the said asssessment was out of time asitwasraised after thelapseof sixyearsandassuchitis 20 invalidasnotfalling within theprovisionsofsection23
(1)ofthe Assessment and Collection of Taxes Laws 1978-1979. This, however,doesnotmean,andIagreewithlearnedcounselforthe respondentCommissioner,thatsuchprofitcanbe disregardedin ascertainingwhetheranactuallosshadbeenincurredintheyear 25 in question, otherwise the applicant company wouldbeallowed to carry forward and set off against theirincomein subsequent yearsalosswhichinrealitywasnotincurred.Thecontentionof counselfortheapplicant Companythatthelossof£497remains, should the assessment prove to be out of time,cannot, stand. 30 Such losswould remain,inmyopinion,onlyiftheprofit which wasmadefrom thesaleofthelandatMakedonitissa isfound to 2666 3 C.L.R. Akinita St.Ioannides v.Republic A.LoizouP. beacapital as.opposedtoarevenuereceipt Thequestion,therefore,whetherthe applicantCompanywasatraderinlandhasto Beexamined. Theissueoftaxability ofprofits arisingfromthesaleofland hasbeenjudiciallyconsideredbythisCourtinanumberofcases. Theprincipleenunciatedbyalltheauthoritiesisthatthequestion isoneofmixedlawandfact andthattheCourtwillnot interfere withthefindingsof therespondent Commissionerifit wasreasonably,open to him to find as he did. (See, inter alia, Lilian 10 Georghiades v.TheRepublic
(1982)3C.L.R.659; HjiEraclis andAnotherv.TheRepublic
(1984)3C.L.R.604;AmaniEnterprises{Houses)Ltdv.The Republic
(1985)3C.L.R. 198;River EstatesLtd. v.TheRepublic
(1986)3C.L.R.2575). 5 Itmayaswellbesaidthatindecidingwhethercertainactivities 15 constitute trading-theexpression "trade"includesadventureor concern inthenatureoftradebyvirtueofsection 5
(2)(f)ofthe IncomeTaxLaws 1961-1981,anumber ofcriteriamayberelevantthough nooneofthemhasanysuperiorforce. Ishallrefer tothefollowing three:(a)thecompany'sobjects, (b)the subject 2Q matteroftherealisation,(c)thelengthoftheperiodofownership and(d)-thefrequency ofnumberofsimilartransactions.:• /-» HavingsetoutthesecriteriaIshallproceedtoexaminethemin relationtothefactsofthepresentcase. 25 3Q Asregardstheissueofthefirstcriterion,namelythecompany'sobjects,onemaylookatitsobjects assetoutintheMemorandumofAssociation,forthepurposeofdiscoveringthenature ofaparticular transactionenteredintobysuchcompany.Thisis clearfrom theauthoritiesbothinEnglandandinCyprus,namely Commissioners of Taxesv.Melbourne TrustLtd. [1914] A.C. 1001;ReesRoturbo Development Syndicate Ltd v.Ducker,13 T.C. 366; Cooksey andBibbeyv.Rednall(HM. Inspector of Taxes). 30T.C.514;AmamiEnterprises (Houses) Ltd v.The Hepublic (l<*(ti·.3C.L.R.198andRiverEstatesv.TheRepublic 2667 A.Loizou P. Akinita St.Ioannides v.Republic
(1988)In Californian CopperSyndicate (Limited andReduced) v. Harris, 5T.C. 159,ClerkL.J.hadthissayatpages165-166. "Itisquiteawellsettledprincipleindealingwithquestions ofassessmentofIncomeTax,thatwheretheownerofanordinary investment chooses torealise it, and obtains a greater 5 priceforitthanheoriginallyacquireditat,theenhancedprice isnotprofit inthesenseofScheduleDoftheIncomeTaxAct of 1842assessabletoIncomeTax.Butitisequallywellestablished thatenhanced valuesobtainedfromrealisation orconversionofsecuritiesmaybesoassessable,wherewhatisdone IQ isnotmerelyarealisationorchangeininvestment,butanact done in what is truly the carrying on, or carrying out, of.a business.The simplest caseisthatof apersonorassociation ofpersonsbuyingandsellinglandsorsecuritiesspeculatively, inordertomakegain,dealingin such investments asabusi- *e ness, and thereby seeking to make profits. There are many companieswhichintheirveryinceptionareformedfor sucha purpose,andinthesecasesitisnotdoubtful that,wherethey makeagainbyarealisation,thegaintheymakeisliabletobe assessed forIncomeTax." Inthecaseinhandamongtheapplicantcompany'sobjects,as theyappearinitsMemorandum,tradinginlandisitsbasicobject. Thisisofdecisiveimportance.Supportfor thisistobefoundin the caseof Cayser, Irvine &Co.Ltd. v.IM.C, 24T.C. 491 at "Again, there is the case where a company is formed to tradeinlandandisfound tobedealingwithitslandmuchas this company has been found to bedealing with its land.In suchacaseIthinkitmightbecomparativelyeasytoholdthat itwasdealingwiththelandasatrader,sincetheCompanyitselfwasformed forthatverypurpose." Movingnexttothesecondcriterion,namelythesubjectmatter of therealisation,Ifindthatthishasbeenconsidered inthecase ofLilianGeorghiadesv.TheRepublic(supra)andfound tobea 2668 3 C.L.R. Akinita St.Ioannidesv. Republic A. LoizouP. mostcrucial.factor indetermining, whetherthereis anintention to trade. ThusPikis,J.,saidatpage670: 5 "Thecharacterof theland purchasedits state of develop mentandfuture potential,aswellastheincomeityieldsatthe time of purchaseorislikelytoyieldinfuture,isamostconse. quentialfactor." J- . ' -. - 'i * • LikewiseinEdwards v.BairstowandHarrison, 36T.C.207, itwas heldthatwhenthesubject mattercannotyieldtoitsowner any incomeorpersonal enjoyment merely by virtue of owner10 ship,acornmercialtransactionis indicated. ThusinSnellv. Rosser Thomas &Co.Ltd., 44 T.C. 343,thetaxpayer -a developer - bought a house and 5 3/4 acres of land.The houseproduced rentfromtenantsbutthelandproducednoincomeandwasthere fore heldtobe stock intrade(seealsoFrazerv. IJR.C, 24T.C. 498). ι 15 . . . , - / . : . . Inourcase theproperty inquestion was land which yielded neitherincometotheirowner,norpersonalenjoyment as.inthe caseof apersonpurchasingapicturefor purposesof aesthetic,en joyment Thisfactorindicatesthat thelandheldwas tradingstock 20 asopposedtoaninvestmentsincethefeature expected ofinvestments,;namelyyieldinganincomewhilebeing held,was lacking' ,T (see/JZ.C.y.Reinhold, 34 T.C.389). 25 Thethirdcriterion, namely,thelengthof theperiodof owner shipisrelevantandashortperiodof ownership is an indication of trading.Thisis tobe found inTurnerv.Last[1965]42T.C. 517,whereCrosssaidthefollowingatp.523: ."Of course,themerefact thanwhen you buy property,as ..well as intending touse and enjoy it, you have also in your mindthetpossibijity thatitwillappreciateinvalue,andthat a : timemay comewhenyou want tosellitandmakeaprofit on , it,does notof itself make you atrader,butif theposition is thatyouintendtosell itassoonasyoucantorecover thecost of thepurchase,thepositionis obviouslyverydifferent - and t 30 2669 A.Loizou P. Akinita St.Ioannides v.Republic
(1988)thatis what the Commissioners, havingheard thisappellant, thoughtwasthepositionhere." Inthepresent casetheperiodbetweenacquisition andsaleof the subject property wasfiveyears, which is arelatively short one.Oneelementofaninvestment isthattheacquirerintendsto 5 holditfor aconsiderableperiodoftimewithaviewtoobtaining, eithersomebenefit inthewayofincomeinthemeantime,orobtaining someprofit, but notanimmediate profit byresale.(See Eamesv.StepnellPropertiesLtd.,43T.C.678.Thesaleof the subject propertyin sucharelatively shorttimeafter itsacquisi- JQ tionisinthelightof theauthoritiesnotcharacteristicofaperson whowishestoholdland asinvestment. Anotherimportant considerationindecidingwhetherornota tradeiscarriedoniswhetherthetaxpayerhasengagedinrepeated transactions of a similar nature.Thus inJ.Bolston &SonLtd., 15 v.Farrely, 34T.C. 161wherethetaxpayercompany whorana passenger serviceboughtalargenumberofboatsinashort time for theservice andresold themafter modification, theCommissioners'finding thatthesalesweremadeinthewayoftrade,was inevitable.HarmanJ.hadthistosayatp.167:"Adealdoneonceisprobablynot(anactivityinthenature ortrade),thoughitmaybe.Donethreeoffour timesitusually is.Eachcasemustdependonitsownfacts". 20 Asimilarview wasexpressed inPickfordv.Quirke, 13 T.C. 251whereRowlatJ.saidthefollowing atpage263: 25 "Nowof courseit isverywellknown thatonetransaction ofbuyingandsellingathingdoesnotmakeamanatrader,but ifit isrepeated and becomes systematic,then hebecomesa traderandtheprofits ofthetransaction,nottaxablesolongas theyremain isolated,becometaxableasitemsinatradeasa 30 whole,settinglossesagainstprofits,ofcourse,andcombining themallintoonetrade." 2670 3C.L.R. 5 Akinita St.Ioannides v.Republic A.LoizouP. Thenumberoftransactionsofasimilarnaturealsoplayapart. InRellimLtd., v.Vise[1951]32T.C.254,theCourtof Appeal soheld.Thereacompany acquired anumberof houses,a farm and 13acresoflandbyfour separatepurchases.Somesixyears later,theland,thefarm andtwoofthehousesweredisposedby five separatesales.Itwasheldthattheprofitsaccruingfromthesestransactionsweretradingprofits. Inthepresentcasetheapplicantacquiredbywayofexchange anumberofimmovablepropertiesandsoldtwoofthemin 1976 10 andanotherbuildingsite,i.e.thesubject property,in 1978.The engagementbytheapplicantinrepeatedtransactionsofthesame naturesupportstheinferenceoftrading. Moreover Iholdon theauthorityofRiverEstates v.TheRepublic(supra)thattherespondentCommissionerwaslegallyenti15 tied todisallow the loss which theapplicants allegedly hadincurredin 1978,astheperiodof sixyearsisinapplicable toloss adjustments. FinallyIshallproceedtoexaminethelastpoint,thatiswhetherthedecisionoftherespondentCommissionertoincreasethein2o comedeclared bytheapplicant Company for theyear 1980by £497,isjustified byhisdisallowing,incomputing theirtaxable incomefor that year, the amount of£497, which the applicant companyclaimedthatitrepresentedlossescarriedforwardfrom fte previousyear.Asalreadyseennosuchlosseswereincurred, 25 asthisamounthadalreadybeendisallowedasalosstobecarried forward andsetoffagainsttheincomeoftheapplicantCompany, for subsequent years by the assessment which was raised in 1979,andwhichwasacceptedbytheapplicantCompanywhich inviewof theiracceptanceof theassessment for theyear 1979, __ leavesthemwithnolegitimateinterest Forallthe abovereasonsthesubjudicedecision totreatthe applicantCompanyastradersinland,inthepresentcase,andto disallowthelossinquestioniscorrectinlawandinthecircumstancesitwasreasonably opentotherespondent Commissioner 2671 A.Loizou P. Akinita St.Ioannides v.Republic
(1988)beingamatterofappreciationofallrelevantfactsamatterwithin theprovince of theadministration, there beingneitheramiconceptionoffact, noroflaw,noranabuseorexcessofpower. Therecourse is therefore dismissed butin thecircumstances therewillbenoorderastocosts. 5 Recoursedismissed. Noorderastocosts. 2672