clr/1988/1988_3_281.pdf

(1)and 13(e)and (f)—Subjudice decisionreasonablyopento respondent. 5 Taxation—income tax—Concessionarypractice—Cannotdefeattaxliability. Taxation—Income tax—Deduciions—Onus of proof—Judicial control— Principlesapplicable. 10 15 Taxation—Income lax—Acquisilionofsharesbyacompanyinanother company—Interest on loan usedfor such acquisition—Whether deductible— Circular 115 of 10.9.69—Change ofpolicy—As a concessionary practice cannotdefeatataxliabilityandas,inanyevent, atthematerialtimethepolicyhadchanged, thedeductionwasrightlydisallowed. Theapplicant company inrecourse483/85 wasincorporated in 1977 for thepurposesof acquiring land on which toerecta hotel complex.Thepurchase of the land was financed by a loan and share capital paid in by the shareholders;theactual construction of thehotel commenced in 1983. 281 Beach Ltd. v. Republic

(1988)The respondent decided that the interest on the loan used for the purchaseof the land is not a deductible expense for income tax purposes for theyears 1978-1982,whereas asfrom 1983,when theconstruction of the hotelcomplex began,it wouldbeconsidered asdeductible. Recourse 483/85 is directed against the said decision. The payment, argued counsel were not made wholly and exclusively for thepurposes of acquiring the income but the land, which constitutes thesourceof income andnottheincomeitself. Counsel argued thatit isby way ofconcession thattheinterest payable after 1983wasdecided tobededucted for purposes of incomelax. 5 10 Theapplicants in recourse649/85 are,also,aprivate company limited byshares.They sought todeduct interest paid for theacquisition of shares in thecompany which filed the first of the above recourses, i.e recourse 483/85. The applicants in 649/85 relied on a circular, i.e. Circular 115 of 109.69 by the Commissioner for Income Tax, in accordance with which theinterest isdeductible irrespectiveof howthemoniespaid for theacquisition wereused by thecompany, whoseshareswerepurchased by theother company. 15 Counsel for therespondent stressed thatthepolicy expressed by thecir- 20 cular changed as from 1969. The new conditions appear in respondent's Manual Held,dismissingboth recourses (A)

(1)Theonusison theapplicant to show that he isentitled toa deduction under theprovisions of the Law; if the respondent's decision was one that was reasonably open to him, this Courtdoesnot interfere.

(2)Inthelightof theaboveandofthecaselaw,land isanassetofcapital nature not yielding income, and therefore, on thebasis of the relevant legislative provisions,itwasreasonably open totherespondent toarriveat theconclusions,hedid,havingconsidered thefacts aforesaid. 25 30

(3)As administrative practice, inthe form of a concession, cannot defeat tax liability, the allowances for the interest payable after 1983,when theconstruction ofthehotel began,donotabsolve theapplicants from their taxliabilitiesfor thepreviousyears.

(4)Itfollows thatrecourse483/85hastobedismissed. 282 35 3 C.L.R. Beach Ltd. v. Republic (B) The applicant in case No. 649/85 cannot rely on a concessionary policyoftherespondent which wasdiscontinued andwasnotinforceatthe material time for this case; furthermore an administrative practice in the form ofaconcession cannotdefeat taxliability. c Recoursesdismissed. 3 No orderasto costs. Casesreferredto: HadjiYiannis v.Republic

(1966)3C.L.R. 338; -0 Panos Lanitis and Sons (Investments) Ltd. v. The Republic

(1984)3 C.L.R. 1598; Kittides v. TheRepublic

(1973)3C.L.R. 123; Georgkiades v.TheRepublic

(1982)3C.L.R. 659; Ceorghiades v.TheRepublic

(1985)3C.L.R.1627; River Estates Ltd. v.TheRepublic

(1986)3C.L.R. 2575; Atherton v.British Insulated andHelsby CablesLtd., 10T.C.155; 15 Hellenic Bank Ltd. v. TheRepublic

(1986)3C.L.R. 267;and on Appeal

(1987)3C.L.R. 1619; Panos Lanitis and Sons (Investments) Ltd. v. The Republic

(1973)3 C.L.R. 667. ^n Recourses. Recourses against the refusal of the respondent to allow as deductible expense for income tax purposes interest paid by applicantsinconnectionwithloansusedfor thepurchaseofland andtheacquisitionofsharesinaprivatecompany. 2<: A. Skordisy for applicants. 283 Beach Ltd. v. Republic

(1988)A. Evangelou, Senior Counsel of the Republic, for the respondents. Cur. adv. vult. LORIS J. read the following judgment. The above intituled recourseswereheardtogetherontheapplicationofbothsidesas 5 theyrevolveonthesamemainlegalissue,notablythedistinction betweencapitalandrevenueexpenditure. By means of recourse No. 483/85 the applicant company challenges the refusal of the Commissioner of Income Tax to allow, as deductible expense for income tax purposes, interest 10 paidbytheapplicantsfortheyears 1978-1981inconnectionwith a loan used for the purchase of land, which was intended for developmentintoahotelcomplex. Theapplicantcompanywasincorporated in 1977asaprivate limitedcompanywithanauthorized sharecapitalof£1,000,

1. 15 It was formed for thepurposes of acquiring land on which to erect a hotel complex at an estimated cost of £1,000,000 and carryonthebusinessofahotelier.Thesaidlandwasfinancedby a loan and share capital paid in by the shareholders; the actual constructionofthehotelcommencedin
2. 20 Onthebasisofauditedaccountsandincometaxcomputations for theyears 1978to 1981,income tax assessments wereraised provisionallybytherespondentontheincomeofthecompanyfor thoseyears. . In 1983onexaminationoftheaccountsofthecompany,are- 25 adjustment wasmade,bydisallowing theinterestdebited inthe accountsinrespect oftheloanused for thepurchaseof theland intended for thedevelopment intoahotelcomplex,andrevised assessmentswereissuedon2December
3. On receiving such assessments the applicant company's 30 auditorsobjected, on 27December 1983,onthegroundthatthe 284 3C.L.R. Beach Ltd. v.Republic Loris J. company did not have any chargeable income during the said years. 5 10 Therespondent Commissioner havingexamined the objection decided to maintain the assessments and communicated his decision bymeansofaletterdated 13February 1985,inwhichit is stated that theinterest paid on loan used to acquire theland in 1978,isconsidered as an expenseof acapital nature for theyears 1978to 1982,enhancing thevalueof the land, and, therefore, not allowable and, further, that such an expense should be a proper deduction as from the year 1983,when the construction of the hotelcomplex began. Itisagainst thisdecision that recourse No.483/85 wasfiled. 15 20 25 30 From what had been stated inthewritten addressesofcounsel for the applicants, it appears that the case rests on proper construction and application of therelevant legislative provisions to theparticular facts of the present case, which are sections 11 and 13of theIncome Tax Laws. Section 11

(1)deals with the allowable deductions and providesthat inascertaining thechargeable incomeofanyperson there shall be deducted all outgoings and expenses wholly and exclusively incurred in the production of the income. By means of paragraph (e) of section 13it is provided that there will beno deduction for any expenditure unless such expenditure is money wholly and exclusively set out or expended for the purposes of acquiring theincome and by means of paragraph (fj'provision is madethat there will benodeduction on anycapital withdrawn or any sumemployed orintended tobeemployed ascapital. It is the stand taken by counsel for the respondents, that the interest payable in thiscase isnot in lawqualified asa deductible expense, because the payments were not made wholly and exclusively for thepurposes of acquiring theincome but the 1?".J, which constitutes the source of income and not the income itself (see HadjiYiannis v. The Republic

(1966)3 C.L.R. 338, 352) 285 LorisJ. Beach Ltd. v.Republic

(1988)and that it was a capital expenditure, irrespective of whether the land was intended to be used for the erection of a hotel, and irrespective of whether the hotel might subsequently yield income. COUP ;el argued that it is by way of concession that the interest payable after 1983 was decided to be deducted for 5 purposesof income tax. He referred in this respect to the case of Panos Lanitis and Sons (Investments) Limited v. The Republic

(1984)3 C.L.R. 1588,where (atpp. 1592-1593),thefollowing are stated: "Itisa well settled principleof income tax law,which has, 10 also,been given statutory effect both hereandinEngland, that nodeduction from taxable income is allowable in respect of capital employed or intended to be employed in a trade; and thatinterest on borrowed money, which iscapital intended to beemployed or is employed, is not allowable as a deduction 15 fromtaxable income (see,inter alia,Halsbury's Laws of England, 4th ed. , vol. 23, p. 211, para. 304, and Simon's Income Tax, 1964-1965, vol. 2, pp. 398, 399,para. 620). The above principle was expounded in, inter alia, The European Investment Trust Company, Limited v. Jackson (H.M. Inspector of Taxes), 18 T.C. 1, 11, which was followed and applied in Ascot Gas Water Heaters Ltd. v.Duff (HM. Inspector of Taxes), 24 T.C. 171, 175, 176 and Bridgwater v. King (MM. Inspector of Taxes), 25 T.C. 385, 388. 20 It is true that in Simon's Income Tax, supra, there is expressed theview (atp.399)that thedecision in TheEuropean InvestmentTrust case, supra,might notwithstand challenge in future, but this forecast does not appear tohave turned out to beacorrect one because,very recently, inPattison (Inspector ™ of Taxes) v.Marine Midland Ltd., [1982] Ch. 145, 159-167, theEuropean Investment Trust case wasagain followed and applied." 286 25 3 C.L.R. 5 10 Beach Ltd. v.Republic LorisJ. On the other hand counsel for the applicant company maintained that underthecircumstances of the case,theinterest paid was not a capital expenditure but money used for the purposesofacquiring theincomeand that thedistinction madeby therespondents,between thetimebefore and after the beginning of theconstruction of thehotelis unfounded. In deciding acase of thisnature itmustbeborneinmind,that the onus is on the applicant to show that he is entitled to a deduction under the provisions of the Law (vide HadjiYiannis, supra, 350, and Kittides v. The Republic,

(1973)3 C.L.R. 123, 133) and that if the respondent's decision was one that it was reasonably open to him, this Court does not interfere (vide Georghiades v. The Republic,

(1982)3 C.L.R. 659, 667, 669 Panos Lanitis and Sons (Investments) Limited, supra, 1593, Georghiades v. The Republic,

(1985)3 C.L.R. 1627, 1633and River Estates Ltd. v. The Republic

(1986)3 C.L.R. 2575, 2585). Having considered the aforesaid main issue in the light of —Atherton v. British Insulated and Helsby Cables Ltd., 10 T.C 155 at p. 192, and bearing in mind, as well, the principles 20 expounded in theLanitis case, supra, agreeing at the same time with theviewexpressed bymy brotherJudge A.Loizou inRiver EstatesLtd. case,supra, (atp.2585),Iholdtheview that interest paid on borrowed money for the purchase of land, is an assetof capital nature not yielding income,and therefore, on thebasisof 25 therelevant legislative provisions,it was reasonablyopen tothe respondent Commissioner to arrive at the conclusions, he did, havingconsidered thefacts aforesaid. 35 Asundertheprovisionsof theLaw,applicantsarenotentitled to thedeductions claimed, and, as an administrative practice,in the form of a concession, cannot defeat tax liability, (see, inter alia,Lanitis case, supra, at p. 1594 -Hellenic Bank Ltd. v. The Republic

(1986)3 C.L.R. 267 at p. 276 and on appeal

(1987)3 C.L.R. 1619) the allowances made in their favour by the respondent Commissioner, for the interest payable after 1983, 287 LorisJ. Beach Ltd.v. Republic

(1988)when the construction of the hotel began, do not absolve them fromtheirtaxliabilitiesfor thepreviousyears. For all the above reasons recourse under No. 483/85 is doomed to failure. Applicant company in recourse No. 649/85 challenges the decision of the respondent Commissioner, not to allow as a deduction, interest paid for theyears 1977 - 1981,in connection with aloan used bythe applicantfor theacquisition of sharesina privatecompany namely Mirator Beach Ltd.,i.e.theapplicant in recourse No.483/85. Thereasons for dismissing theclaim of theapplicants in case No. 649/85 as contained in a letter of the Respondent dated 20 February, 1985, is that the interest paid on the loan for the purchase of the shares were not expenses incurred for the purpose of acquiring the income, since Mirator Beach Ltd. used thefunds accrued from the saleof the shares,inorder to acquire land,thedevelopment of which started in 1983. 5 10 15 Apart from the common main issue arising in both aforesaid cases, which has already been determined above, this latter case presents another side issue notably theeffect of Circular No. 115 20 addressed by the respondent Commissioner to All Assessing Staff on 10.9.69 (vide Appendix "A" attached to the written addressof the applicant). Learned counsel for the applicant relying on the aforesaid circular submitted that,interestinrespect ofmoney borrowed for 25 the purchase of shares in a private company are allowable deductions for purposes of income tax, irrespective of the purpose for whch the applicant company incase No.483/85 had used themoney accrued from thesaleof itsshares. Learned counsel for the respondent conceded that the respondent allowed interest for the purchaseof shares in private companies but stressed (

1. a)that this was done by way of 288 30 3 C.L.R. Beach Ltd. v.Republic LorisJ. concession (
2. b)that this policy has changed since 1969 and it is now granted subject to certain conditions which appear in Respondent's manual (Ex. 1) paragraph (
3. b)of which reads as follows: 5 "INTEREST ON LOANS FOR NON-TRADING PURPOSES TheConcessional deduction inrespectofpaymentsof interest should berestricted tointerest on money borrowed for any of thepurposesmentioned below:(
4. a)Residence 10 15 20 25 30 (
5. b)The purchase of shares in a private company, or the lending of money to such company for use in its business where theborrower hasasubstantial holding inthe company. Incaseswhere acapitalassetisacquired byaprivatecompany which isof such a nature that hadit been acquired by anindividual would not entitle him toclaim interest on money borrowed for its acquisition, the purchase of shares in, or the lending of money to, such private company, in order to finance thepurchaseof such asset,would notentitle aperson to claim interest on money borrowed for the purchase of shares in,orthe lend of money to,such company.". From theaboveconditions,learned counsel for the respondent maintained,itisclearthattheconcession isonlyavailableincases where theasset acquired by thecompany isof such anature that hadit been acquired by anindividual, wouldentitle himtoclaim intereston money borrowed for itsacquisition; andcounsel added "in the present case, Mirator Beach Hotel, the shares of which were acquired by Applicant, used the funds acquired to finance the purchase of land, an asset of capital nature not yielding incomeand which would nothavebeen allowed inthecase of an individual." Having carefully considered thisadditional issue,Ihave come 289 Loris J. Beach Ltd.v. Republic

(1988)totheconclusion that theapplicant incaseNo.649/85cannotrely on a concessionary policy of the respondent which was discontinued andwasnotinforce atthematerialtimeof thiscase; furthermore an administrativepracticeintheformofaconcession cannot defeat tax liability (videLanitis case,supra,atp. 143). 5 ^ince a concessionary policy could freely be revoked by the adn nistration (videStassinopoulosontheLawofAdministrative Acts, 1951,p.409 and PanosLanitis &Sons (Investments) Ltd. v. The Republic

(1973)3C.L.R.667, 685,686), more so, in the exercise of their discretionary powers, they could freely impose JQ conditions in granting allowances,towhich thetax-payersarenot otherwise entitled undertherelevant legislative provisions. In the result both recourses fail, for the reasons I have endeavoured to explain above; and they are accordingly dismissed. Let therebe noorder astocosts. 15 Recourses dismissed. No orderastocosts. 290