clr/1988/1988_3_2673.pdf

(1)and 13(e)— Expenseswhollyandexclusivelyincurredfor theproductionofincome— Companies limited byshares,incorporated under theCompanies Law, Cap.113—Loans toDirectors-r-Contrarytosection 182

(1)—Therefore, interestpaidbycompanyinrespectthereofisnotdeductible. Recoursefor annulment—Practice—Statementsofcounselastofacts—Canbe reliedupon,iftheyarebornoutbytheadministrativefilesoriftheyarenot denied. 10 Legitimateinterest^Acceptanceoffacts—Nolegitimateinterestto challenge them. Thefactsofthiscasesufficiently appearintheJudgmentoftheCourt. Recoursedismissed. Noorderastocosts. 2673 Athenaikon Styl v.Republic

(1988)Casesreferredto: VitaOraCo.Ltd.v.TheRepublic

(1973)3C.L.R.273; Georghiouv.TheRepublic

(1986)3C.L.R.

1. Recourse. Recourse against the income tax assessment and the special contribution imposed on applicantsfor theyears 1973-
2. M. Pelides, for theapplicants. A.Evangelou, Senior CounseloftheRepublic, for therespondents. Cur. adv. vult. JQ A. LOIZOU P.read the following judgment. By the present recourse theapplicant Companyseeks: "A.ADeclaration that theRespondent's actof investigating theApplicants'income taxliability for theyearsof assessment 1973-1979andtheApplicants'liability for specialcontribution levyfor theyears of assessment prior to 1980 isnull andvoid andof nolegaleffect whatsoever. 15 B. ADeclaration that theAssessment of theApplicants'income for the years of assessment 1973-1983 and theimposition of tax thereon isexcessive and/or null andvoid andof no 20 legaleffect whatsoever. C. A Declaration that theRespondent's assessment of Applicants' income for special contribution for thequarters 2/82 to4/82and 1/83 to4/83andtheimposition of interest thereon isnull andvoidandof nolegaleffect whatsoever." 25 The applicant Company isaprivatecompany withlimitedlia2674 3 C.L.R. 5 10 15 20 25 35 Athenaikon Styl v. Republic A. Loizou P. bility incorporated on the 22nd June
3. Its authorised share capital onthe31st December 1983 was 160,000Ordinary Shares of onepoundeach andits issued andfully paid share capital was 50,000 shares of one pound each. It derived its income, during thematerial timefromthemanufacture andsaleof shoes. The accounts for the period 1st July 1973 to 31st December 1984 and for the years 1975 to 1983 which were submitted on various dates by the auditors of the applicant Company,were ex­ amined andthecomputationsof chargeable incomewere adjusted as shown on thestatementattachedtotheletterof therespondent Commissioner of the 23rd January 1986, addressed to thecom­ pany's auditors Messrs loannou, Zampelas and Co. Notices of assessment were also senton the24th January 1986, totheappli­ cant Company for theyear of assessment 1977 (year of income 1976) which was underobjection andfor theyears of assessment 1981,1982 and 1983 (Appendix "C"). By theirletterof the 11thFebruary 1986 theauditors of theap­ plicant Company objected against the 1981, 1982 and 1983 in­ cometax assessments and against thespecial contributionassess­ ments for the quarters February 1982, to April, 1983, on the ground that they disagreed with the decision of the respondent Commissioner todisallow partof theBank interestcharged inthe profit and loss accounts as the company had substantial profits for theyears 1978 and 1980 to 1983 andconsequently thefinan­ cing of thedirectorscurrentaccountswas effected outof thecom­ pany's profits and notout of theoverdraft or loan accounts (Ap­ pendix'!)"). TherespondentCommissionerhaving considered the objection filed on behalf of theapplicantCompany maintainedhis original decision todisallow thesaid amountsof interest as shown onthe statement attached to his letter of the23rd January 1986 andde­ termined the objection accordingly and informed the applicant Company of his decision, (Appendix Έ " )by letterdated the26th March, 1986 together with the notices of tax payable dated the 26th March,
4. 2675 A.LoizouP. Athenaikon StyIv.Republic

(1988)Bytheirletterofthe 18thApril 1986,theapplicantCompany's auditorsgavesupplementaryinformation totherespondentCommissionerregardinghisargumentsthatthecompanyhadprofits and that thefinancing of thedirectors'current accountswas effected out of theCompany's profits andnotoutof theoverdraft 5 andloanaccounts.(Appendix"F"). After considering the auditor's said letter, the respondent Commissionermaintained hisoriginaldecisionandinformed the applicantCompanybyhisletterofthe9thMay 1986,(Appendix "G") thathe has nothing to addtohisletterof the26th March, JQ

1. BytheirpresentrecoursetotheCourt,theapplicantCompany introduced additionalpointsofobjection onmattersthathadpreviouslybeen,asclaimedbytherespondentCommissioneragreed betweenhimandtheapplicant'sauditorsandthatinfacttheap- 15 plicant Company disputes therespondent Commissioner'sdecision todisallowvariousitemsofexpenditureasindicatedinthe latter'sletterofthe23rdJanuary
2. Inparagragh 12of theopposition thepointsindisputeinthe presentrecourse asdisallowedbytherespondent Commissioner 20 aresummedupasfollows:"(a)Capitalallowancesonfurniture-1981 Thecompanyinitsaccountsclaimedaccelerateddepreciation in respect of furniture, amounting to £1,
3. This wasdisallowedandawritingdownallowance(WDA)of 25 10%allowedinstead. i.e (£1310 - £131) =£1,179.The 10%W.D.A. of £131 wasalsoallowedin 1981and
4. Thecompanywasnoteligibletoaccelerateddepreciation, onfurniture in 1981under s.12of theIncomeTaxLaws 30 1961-
5. 2676 3C.L.R. Athenaikon Stylv.-Republic A.LoizouP. (b)Customersentertainmentexpenses 1976 1977 1978 1979 1980 1981 1982 1983 Peraccounts£1719£1673£2643£1647£1938£1825£2013£3611 5 10 Amount disallowed£500 £500 £500 £500 £500 £500 £500 £500 (c)Overseastravellingexpenses 1978 1979 1980 1981 1982 1983 Peraccounts £1728 £243 £2369 £3529 £4371 £6991 Amount disallowed 15 £500 — £500 £500 £500 £500 Regardingpoints(b)and(c)abovetheamountof£500disallowed in the years indicated, had been agreed between therespondentandtheapplicantcompany'sauditors. (d)Valuationofbuildingexpenses—£300in
6. 20 (e)Mortgageexpenses—£1138in1981 TheRespondent Commissionerdisallowed boththeabove mentionedexpensesclaimedbytheApplicantcompanyasa deductioninitsaccountsin 1979and 1981onthegrounds that theseexpenses were not expenses wholly and exclusivelyincurredintheproductionofincome.Thishadbeen argeedwiththeApplicantcompany'sauditor. 25 (f)Investmentallowances.. 2677 A.LoizouP. Athenaikon Stylv.Republic

(1988)Theinvestmentallowancefor scissorsandotheritemswas disallowedin 1975and1976inviewofthefactthattheApplicantCompanyhadoptedfortherenewalsbasisinrespect of sucharticles.Therefore theprovisionsofs.12oftheIncomeTaxLaws 1961to1983regardingplantandmachin- 5 ery wouldnot beapplied.Undertherenewalsbasiswhich isappliedbyconcession,thesystemofcapitalallowances is not applied but when a piece of machinery or plant comestoberenewedthenetcostofreplacement (i.e.the costofthenewitemlessanythingreceivedfortheold),ex- ,, eludingamountsrepresentingadditions orimprovementsis allowedasadeduction.Howeverthisbasisisappliedasan alternativetotheprovisionsofsection 12oftheIncomeTax Lawsandnoinvestmentallowancesaregrantedwherethis basisisapplied. (g)SalariesofMrs.PanayiotaTsingi. 1979 1980 1981 1982 1983 Peraccounts £1000 £2000 £2000 £3000 £3500 Amountsdisallowed — 500 500 1200 1500 OnthebasisofavailableevidenceMrsTsingidoesnotappear toworkregularly for theapplicantcompany.Therefore part of hersalary wasdisallowed asnotbeinganexpensewholly andexclusivelyincurredintheproductionofincome. 25 ThishadbeenagreedwiththeapplicantCompany'sauditors. (h)Interestnotallowed 1978 1979 1980 1981 1982 1983 Disallowed £112 £630 £1476 £2270 £2673 £2780 30 2678 3C.L.R. 5 Athenaikon Styl v.Republic A.LoizouP. TheaboveamountsofinterestclaimedbytheapplicantCompanyweredisallowed bytheRespondent sincetheywerenot anexpenseincurredwhollyandexclusivelyfortheproduction of income but for thepurpose offinancingadvances bythe companytoitsdirectors. Theamountsdisallowed foreachwerearrived atbyapplying 9%totheaverageofthedirectorsloanaccountsatthebeginningandend oftheyear. 10 Thiswastheonly pointwhich hadnotbeen agreed between Applicantcompany'sauditorsandRespondent" Itisthecasefor theapplicant Company that therewasnever any agreement.between them through theirauditorsand therespondent Commissioner. Their version is that, following their objections, there were several meetings between their auditors andofficers oftherespondentCommissionerandinthecourseof these negotiations an understanding reached in the form of a package deal.Thisunderstanding was however,rejected bythe respondent Commissionerandtherefore itnevercrystalized into anagreement.' 20 25 Beforeproceedinganyfurther Iwouldliketoresolvethisissuewhichhasnotbeencarriedanyfurther thanthestatementsof counsel on both sides,though four weekstimewasallowed by theCourt totheapplicant Company tofileanyaffidavit andthe sameperiodtotherespondent Commissioner, aswellfor filling anaffidavit in reply. Ithas been thepracticeof this Court toaccept statementsof counsel asforming partofthefactual substratum of thecaseso longassamewasbomoutfromthematerialinthefileorwasnot questionedbytheotherside. 30 Inthepresentcasethereisanassertiononbehalfoftheapplicant Company,whichisquestioned bytherespondentCommis2679 A.Loizou P. Athenaikon Stylv.Republic

(1988)sioner,toproceedfurther andinvoketheletteroftheauditorsof the applicant Company of the 11thNovember 1986,bywhich theysubmittedobjectionstothealterationseffected tothetaxable incomeof theirclientcontained intheletterofthe23rdJanuary 1986,aswellastothetaxassessedandtheonlygroundwasthat 5 therespondentCommissionerdidnotaccepttheinterestwhich relatedtothedirectorsoftheCompany,(Appendix "D").Itiscontendedon this ground bytherespondent Commissioner thatby merelyconfining their objectiontothequestionofinteresttheapplicantCompanyhadacceptedtheagreementreachedandsoitdid notobject to the other amendments effected by therespondent Commissioner. MoreovertheauditorsoftheapplicantCompanyafterthe final decisionof therespondentCommissioner wascommunicatedto themaskedbytheirletterdatedthe18thApril1986,fromhimto ,5 re-examine thecasein sofar asitreferred totheinterest which was not allowed by him. That was the only point which they wereseeking for re-examination (AppendixF).Onthe9thMay 1986,therespondentCommissionerinformed theapplicantCompany thathehad nothingtoaddtohisfinaldecisionwhichhad been taken on the28th March, 1986,(Appendix G).Thatbeing soIhavecometotheconclusionthatthesoleissuebeforemefor determinationisthatoftheinterest,theresthavingbeenaccepted bytheapplicantCompany,andsotheyareleft withnolegitimate interesttoproceedwiththerestoftheissuesraisedbythepresent 25 recoursewhichshould failtothatextent. Iconsider it, however, useful toexamine all thegroundsof law sothat in case I am found to haveerred on this issue the wholecasecanbereviewedonappeal. Istartwith theinterestwhichwasnotallowedbythe respon- 30 dentCommissioner. Inrespectof thispointtheargumentisthat therespondentCommissionerfailedtoascertainthecorrectfactualbackgroundandthereforehewasatallmaterialtimeslabouring underamisconceptionoffact.Itwasfurther submittedonbehalf of the applicant Company that the subjudice decision wasnot 35 2680 3C.L.R. Athenaikon Stylv.Republic A.LoizouP. reasonablyopentotherespondentCommissioneronthematerial before him. In particular by aletterdated the 18th April 1986, (Appendix "F"),theapplicantCompanyclaimed thatthededuction shouldbeallowedforthefollowinggrounds:5 (i)asitappearsfrompage3ofAppendix"F"theapplicantCompanyhadmadeprofitsinalltheyearsfrom1980-1983. (ii)Thisprofit ineachyearwasmuchhigher thaneithertheincreaseinthecompany'soverdraft ortheincreaseinthedirectors'currentaccounts. 10 (iii)TheCompanyalsohadsubstantialwritingoffallowances. (iv)Accordinglynoonecanarguethattheincreaseinthedirectors current accounts waspaid from the overdraft and not fromthe Company's profits, orfrom thewritingoff allowances,whichistheapplicants'allegation. 15 AsstatedabovethedecisionoftherespondentCommissioner iswrongonaleasttwogrounds,mamely:(a)thathefailed tomakeacorrectassessment of the factual background and his conclusions were therefore wrong; and 20 25 30 (b)thatonthefacts beforehimthedecisionwasnotreasonablyopentohim. Theanswertotheaforesaid contentionsisthat theapplicant Companyisanenterpriseexclusivelyengagedinthemanufacture andsaleof shoesandnotinthelendingof moneyand therefore thelendingofmoneytoitsdirectorsiscontrarytolawandinparticularto Section 182

(1)of the CompaniesLaw,Cap. 113. On thisbasistheinterestderivedfromthelendingofmoneytoitsDirectorsdoes notconstituteexpenseswholly and exclusivelyincurredfor earning anincomeasprovidedbySections 11

(1),13 (e)oftheIncome-TaxLaws.Suchanissuewasjudiciallyconsid268 l· A.Loizou P. Athenaikon Stylv.Republic

(1988)ered in thecase of VitaOraCo.Ltd.v.TheRepublic

(1973)3 C.L.R.273,whereit washeld thatsinceanamountgiven tothe directorsofthatCompanyintheformofaloanwasnotusedfor thepurposesof theCompanyasrequiredbySection 34, subsection

(2)oftheIncome-TaxLawasamendedbySection 31 ofthe 5 Income-Tax (Amendment)Law 1969(LawNo.60of 1969),the applicant Companyinthatcasewasnottaxedwithreduced factors. Moreover in thecase ofStavros Georghiou v.TheRepublic

(1986)3C.L.R. 1755,approvedonappeal,theCourtheldthatin JQ orderthatthetaxpayer,maybeentitledtoareductionprovidedby section 11

(1)(e)of theIncome-Tax Laws 1961-1977,hehadto satisfy therespondent Commissioner thattheamount for which heisclaiming adeduction mustconstituteexpenses whollyand exclusivelyincurredfortheearningofanincome. 15 In viewof this and asthematter turned on thefactual backgroundofthecase,thisgroundshould fail. Intheresulttherecourseisdismissed,thesubjudicedecision confirmed, but in thecircumsta» ·>, however, there will beno orderastocosts. Recoursedismissed. Noorderascosts. 2682 20