clr/1988/1988_3_381.pdf

(76)to

1. TheapplicantisagynaecologistandshehasbeenexercisingherprofessioninNicosiasince
2. 15 Themainissueinthisrecourseiswhethertheprofit thattheapplicant madebythesaleofcertainpropertiesatAglandjia andTersephanou,isof acapitalnatureandthusnotliabletoincometax,orwhether such profit wasmadeinthecourseofatradinginlandbytheapplicantinwhichcase 381 Lerni v. Republic

(1988)it is liable toincometax. Thepurchases andsalesof immovable propertyeffected by theappli­ cantovertheperiodconcernedarethe following:

1. Purchase ο 16.10.68 of a building site at Larnaca for £4,160.which was partly tinanccd by aloan of£2,000.-Theproperly was sold in 1973 for £9,200.-Itis the allegation of theapplicant thatthisproperty was purchased for the purposeof building onitaclinic. 5
2. Purchase on 6.10.69 of a plot of land at Voroklimi for £5,200.- , payable by instalments. Theapplicantclaimsthatsheboughtitasaninvest­ ment. Thisproperty hasnotasyetbeensold. 10 3.(a)InAugust 1972 the applicantpurchasedabuilding sitein Aglandjia for £5,000.-, payable by instalments,(b)Later, inthesame year, she bought again on creditan adjacent site for £3,000.-Bothsites were, ac­ cording toapplicant purchased in ordertobuild onthemaclinic andher residence.Bolhsites were sold in 1978for £25,000.- 15 r 4.Theapplicant,in 1974,boughtfiveplotsof landatTersephanou,for £9,319.-for thepurpose,as theclaims,of creatinganorchard.Her allega­ tion is thatthispropertywas boughtwith themoneyreceived from the sale of item

(1)above. Shesold itin 1978 for£20,000.- and 5.On 12.10.77andon7.10.78shepurchased two adjoining houses in Nicosia,for £34,650.,and£50,400.- respectively, which shenow uses as aclinicandaresidence. 20 It is the allegation of theapplicantthat thesalesof thepropertiesun­ deritems

(3)and

(4)above were madefor thepurposeof enabling herto buy thepropertyunderitem

(5). 25 Held, annulling the subjudice decision:

(1)Thequestion is oneof mixed law and fact and this Courtwill notinterfere with the Commis­ sioner'sdecision,if itwas reasonably open tohim toarrive atthe conclu­ sion hedid on the facts before him,provided, also, thatthelaw was ap­ pliedcorrectly.

(2)As ageneral rule isolated transactionsby ordinary landowners are nottreatedas tradingin land, butasrealizationsor substitution of invest­ ments,nomatterthatsteps aretakentoenhancethevalue of theproperty before its sale.Thegeneral principleis thateachcase mustbedecidedin thelight of its own particular circumstancesandparticularview must be 382 30 35 3 C.L.R. Lerni v. Republic hadtothetransactionitself.

(3)Thebuildingsitesat Aglandjia wereobviously purchased for the purposeofbuildingaclinicandahousethereon.Thisisevidencedbythefact thattheapplicanthadproceededtoprepareplansforbuilding.Thefactthat 5 shelateron,before proceedingtoimplementherplans,found abetterinvestmentoramoreconvenientstructurefor herneedsanddecided tosell thosepropertiesinordertobuythenewinvestmentisacaseofsubstitutionofoneinvestmentforanotherandnotacaseof tradinginland,even though thesaidpropertieswere sold ataprofit. Thegenuinessof appli10 cant'sallegationasregardsthepropertyinTersefanou isevidencedbythe fact thattheapplicantproceededtoobtainpermitstosink wells.Thefact thattheapplicantdidnotproceed,until1978totheerectionoftheorchard mustnothavesomuchbearingonthecase,asalandownerisatlibertyto postponeorevenchange hisplans.Theproperty inquestion was finally 15 sold in 1978for thepurposeoffinancingpartly thepurchaseof ahouse and aclinic by theapplicant,atGlastone street,Nicosia,thatisitem

(5)earlierreferred to.Thisagainamountstoasubstitution ofoneinvestment foranother. Subjudicedecisionannulled. Costsinfavourofapplicant. 20 Casesreferredto: Agrotis v. TheCommissioner ofIncome Tax, 22C.L.R. 27; Droushiotis v.TheRepublic

(1967)3C.L.R. 15^ Georghiades v. TheRepublic

(1982)3C.L.R.659; 25 Philippou v.TheRepublic

(1983)3C.L.R.1386; HjiEraclis& anotherv. TheRepublic

(1984)3C.L.R.604; AmaniEnterprises v.TheRepublic

(1985)3CXJR.198; Pitsiakkos v.The Republic

(1985)3C.L.R.1700; 383 Lerni v.Republic

(1988)Varnavides v.TheRepublic

(1986)3CLR. 1385; RiverEstatesLtd. v.TheRepublic

(1986)3C.L.R. 2575; California CopperSyndicate(LimitedandReduced)v.Harris[1904] 5 T.C. 159; Turnerv.Last[1965]42T.C517; 5 Taylorv.Good[1974] 1 W.L.R.

1. Recourse. Recourseagainsttheincometaxassessmentsraisedonapplicantinrespectoftheyears1977-
2. G. TriantafyHides, fortheapplicant. 10 A. Evangelou,Senior Counsel of theRepublic, for therespondent. Cur. adv. vult. DEMETRIADES J. read the following judgment. The presentrecourse isdirectedagainsttheassessmentsraisedby15 therespondentsasregardstheapplicant'sincomeinrespectof theyearsof assessment 1977

(76)to 1980,whichwerecommunicated totheapplicantbyletterofrespondentNo.2,dated the25thOctober,

1. Theapplicantisagynaecologistandshehasbeen exerci.-20 singherprofession inNicosiasince
2. Onvariousdates,theapplicantsubmittedreturnsofherincomeinrespect of theyearsofassessment 1977- 1980, stating(that they were estimated figures since she did not keep proper accounts. The Commissioner raised assessments for 25 thesaidyearsagainstwhichtheapplicantobjected.Inorderto resolve the objections, the Commissioner required and obtainedfromtheapplicant'staxconsultant,astatementofassets 384 3C.L.R. Lerni v.Republic DemetriadesJ. andliabilitiesasatthe31stDecember,
3. Duringtheexaminationoftheapplicant'staxliabilityonthe basisof thestatementof herassetsandliabilitiesobtainedas above, as well as another one submitted by her in 1973,it 5 transpiredthattheapplicanthaddealingsinland,asaresultof which shewasasked by theCommissioner toproduce more information and particulars. After several meetings between therespondent ontheonehandandtheapplicant andhertax consultantontheother,theCommissionerdeterminedtheob10 jectionstreatingthetransactionscarriedoutbytheapplicantas tradinginland,andcommunicatedhisdecisiontotheapplicant byletterdatedthe25thOctober,
4. Inadditiontheapplicantwasrequiredtopaya 10percentumsurchargeonthedifference betweentheamountofhertax 15 asfinally ascertainedandtheamountofthetemporarytaxpaid byheronthebasisofherestimatedreturn,inaccordancewith theprovisionsofsection29

(1)oftheAssessmentandCollection of Taxes Laws 1978 to 1979.She wasalsorequired to payinterestontheadditionaltaxdemanded,attherateof6per 20 centumfortheyear 1977

(76)and9percentumfortheremainingyears. Asaresultofthedecisionoftherespondents theapplicant filed thepresentrecoursebywhich shechallenges theabove assessments. 25 Themainissueinthisrecourseiswhethertheprofit thatthe applicant madebythesaleof certain properties at Aglandjia andTersephanou, isofacapital natureandthusnot liableto incometax,orwhethersuchprofit wasmadeinthecourseofa tradinginlandbytheapplicant,inwhichcaseitisliabletoin30 cometax. Beforeproceedingtodealwiththeissueraisedintheseproceedings,Ifind thatitisnecessarytoseewhatwerethetransactionsinlandthatwerecarriedoutbytheapplicantandwhich 385 vmetriades J. Lerni v. Republic

(1988)ledtherespondent Commissionertoreach hisdecisionthat she wastrading in land. Thepurchases and salesofimmovable property effected by .'teapplicantovertheperiodconcerned arethe following: 1.On the 16thOctober, 1968,purchaseof abuilidng siteat 5 La~naca for £4,160.- which was partly financed by a loan of £2 000.-. The property was sold in 1973 for £9,200.-. It is theallegationoftheapplicantthatthisproperty waspurchased for thepurpose of buildingon itaclinic.(Itistobenoted that theprofit madeoutof thistransaction doesnotform partof the 10 presentrecourse).

1. Purchase on the 6th October, 1969,of a plot of land at Voroklini, for £5,200.-.The price of this property was paid by instalments. The applicant claims that she bought it as an investment.This property hasnot asyet been sold. 15
2. (a) In August 1972 the applicant purchased a building siteinAglandjia for£5,000.-which amount sheagreed topay by instalments, (b)Later, in the same year, she bought again on credit an adjacent site for £3,000.-. Both sites were, according tothe applicant's case,purchased inorder tobuild on 20 them a clinic and herresidence. Both sites were sold in 1978 for £25,000.-.
3. The applicant,in 1974,boughtfive plots of land at Tersephanou, for £9,319.- for the purpose, as she claims, of creating an orchard. Her allegation is that this property was 25 bought with the money received from the saleof the building siteatLarnaca (property underitem

(1)above). She sold itin 1978for £20,000.-. And 5.The last transaction oftheapplicant inland,the purchase on the 12th October, 1977 and the7th October, 1978,of two 30 adjoining houses in Nicosia, for £34,650.- and £50,400.- respectively,which she nowusesasaclinic andaresidence. ,386 3 C.L.R. Lerni v. Republic Demetriades J. Itistheallegationoftheapplicantthatthesalesofthepropertiesunderitems

(3)and

(4)aboveweremadeforthepurpose ofenablinghertobuythepropertyunderitem

(5). 5 10 15 20 25 30 Counselfortheapplicantarguedthatallacquisitionsofimmovablepropertymadebytheapplicantweremadeforinvestmentpurposesandthesalesmadebyherwereeitherinthenature of a change of investment or to buy premises for the purpose of using them as a clinic and residence and these transactionsdonotamounttotradinginland.Asaresult,the profitsrealizedfromthesaleofthepropertiesinquestionare not taxable. Counsel alsocontended that the Commissioner waslabouringunderamisconceptionoffactastothedatesof thepurchasesofthepropertiesinquestion and,also,astothe intended purpose of the purchase of the building sites at Aglandjia andTersephanou. Counselfor therespondent submitted thatthedispositions bytheapplicantofthelandatAglandjia andTersephanouconstitute transactions in the natureof trade and, therefore, the profitrealizedtherefrom istaxable.Counselarguedthatthere wasanintentiontotradeonthepartoftheapplicantandthisis evidencedfromthefact thatthepropertiesinquestionyielded noincome;thattheirpurchasepricewaspaidby instalments and,thattheperiodofownershipofthesaidpropertiesbythe applicantwasshort. Thequestionwhich hastobedecided hereiswhetherthe profitswhichtheapplicantrealizedfromthesaleofthelandat Aglandjia and Tersephanou werederived from a concern or adventureinthenatureoftrade. Thequestionofthetaxabilityofprofitsarisingfromthe saleoflandhasbeenconsideredbythisCourtinanumberqf cases (seeAgrotisv.The Commissioner ofIncomeTax,22 C.L.R.27;Droushiotis v.TheRepublic,

(1967)3C.L.R.15; Georghiadesv.TheRepublic,

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

(1983)3C.L.R.1386;HjiEraclis & another 387 >emetriades J. Lerni v. Republic

(1988)v. The Republic,

(1984)3 C.L.R. 604; Amani Enterprises v. TheRepublic,

(1985)3C.L.R. 198;Pitsiakkos v. The Repub­ lic,

(1985)3 C.L.R. 1700; Varnavides v. The Republic,

(1986)3 C.L.R. 1385; River Estates Ltd. v. Republic

(1986)ΐ C.L.R. 2575). What emanates from theabove authoritiesis thattheques­ tion is oneof mixed law andfact andthisCourtwill notinter­ fere with the Commissioner's decision if it was reasonably ο ien tohim toarrive at theconclusion hedid on the facts be­ fore him provided, also, thatthelaw was applied correctly. It 10 also transpires thattheattitudeof thecourts,both here andin England,where therelevant legislativeprovision is thesame is ' not,as a general rule,totreatisolated transactionsby ordinary landowners as profits from trading inland,but as realizations or substitution of investments,nomatterthatsteps aretaken to 15 enhancethevalue of thepropertybefore its sale. 5 In California Copper Syndicate (Limited and Reduced) v. Harris, [1904] 5 T.C. 159, Clerk LJ. at pages 165-166 had thisto say: "It is quite a well settled principleindealing with questions 20 of assessment of IncomeTax thatwhere theowner of anordi­ nary investment chooses to realize it, and obtains a greater price for it than heoriginally acquired it at,theenhancedprice is notprofit in the sense of Schedule Dof theIncomeTax Act of 1942 assessable toincometax. But it is equally well estab- 25 lished thatenhanced values obtained from realization orcon­ version of securities may be assessable where what is done is not merely a realization of change of investment, but an act donein what is truly thecarrying on,orcarrying outof a busi­ ness." In Turner v.Last, [1965] 42 T.C. 517, thefollowing is stated, at p.523: "Of course the mere fact that when you buy property as well as intending to use and enjoy it, have also in mind the possibility that it will appreciate in value and that a time 35 •388 3 0 3 C.L.R. Lerni v. Republic Demetriades J. may come when you want to sell it and make a profit on it doesnotofitself makeyou atrader, butif theposition is that youintend tosellit assoon asyou canrecover thecost of the purchase,theposition isobviouslyvery different." 5 10 15 20 InLilianGeorghiades v.TheRepublic, (supra),the following wasstated atp. 670: "The character of the land purchased its state of developmentandfuture potential,aswellastheincomeityieldsatthe timeof purchaseorislikelytoyieldinfuture, isamostconsequential factor. (See, Johnston v. Heath [1970] 1 W.L.R. 1567;CalifornianCopperSyndicate(LimitedandReduced) v. Harris, 5T.C. 159; Edwards (H.M. Inspector of Taxes) v. Bairstow & Harrison, 36 T.C. 207; Tempest Estates Ltd. v. Walmsley, cited in Simon's Taxes, Vol. Bl. 618; Turner v. Last, 42T.C. 517). Asstableinvestment may naturally lead totheinference that the investor merely changes one form of investment for anotherwithout any intention,on hispan, totradewith the land itself. It may properly by assumed that the viability of the investment and theincome itislikely toproduce in future, isthe dominantconsideration inthemindof the investor". In Taylor v. Good, [1974] 1 W.L.R. 556, a retail grocer bought a house with grounds at apublic auction,having in mind thepossibility thatheandhisfamily mightlivethere.Since,how25 ever,hiswife objected, heobtained,4yearslater,aplanning permission todevelop theproperty bytheerection of 90houses and solditto afirm ofdevelopers ata considerable profit. His profit was assessed to income tax and his appeals both to the special Commissioners and to the High Court were dismissed on the 30 ground thatalthough therehadnotbeen initial tradingatthetime of the purchase, there was sufficient evidence to support the Commissioners' findings of supervening trading. On appeal by thetaxpayer, theCourtof Appeal held,allowing the appeal,that whereataxpayer, not beingapropertydeveloper, bought proper389 Demetriades J. Lerni v.Republic

(1988)ty with no initial intention of selling it for profit but later took stepstoenhanceitsvalue,did notamount toanadventureorconcernin thenatureof trade,assessabletoincometax. Russel L.J., in delivering the judgment of the Court, after making reference to a number of cases, said the following at p. 5 560: "All thesecases, it seems to me,point strongly against the theory of law that a man who owns or buys without present intention tosell landisengaged in tradeifhesubsequently,not being himself a developer, merely takes steps toenhance the 10 value of the property in the eyes of a developer who might wish tobuy for development." InPitsiakkos v.TheRepublic, (supra),theapplicant, an Estate Agent, divided land gifted tohimbyhisfather intobuilding sites and sold several of them. Being assessed to income tax on the 15 profits realized from thesales,hefiled arecoursetothe Supreme Court.Thelearned trialjudge,after makingreference tothecase law, found as follows, at p. 1712: "Inthelightofthe aboveauthoritiesand bearinginmind the circumstances of the case, especially the fact that the 20 property wasgifted totheapplicant byhisfather, as wellas thefact that there were nootherpurchases and saleson his part,11think that a finding of trading in land on thepart of ^ the Commissioner was not warranted. The applicant was not himself a -developer and had no other transactions in 25 land. Being an estate agentdoes notmake him a developer aswell". / The general principle isthateach casemust bedecided in the light ofitsownparticularcircumstances andparticularviewmust be hadtothetransaction itself. In thepresent case, the building sites atAglandjia were obviously purchased by the applicant for the purpose of building a clinic and a house thereon.Thisisevidenced by the fact that the 390 30 3 C.L.R. Lerni v. Republic Demetriades J. applicant, as soon astheproperty wastransferred in hername, proceeded toprepareplansfor building,instructing anarchitect for thispurpose,and,also,payingtheamountof£750.-tohim. Thefact thattheywerepurchased byinstalmentsisimmaterial, 5 bearinginmindthatthisistheusualpracticeinCyprusasisalso thefactthattheywerenotproducinganyincomeatthetime,bearinginmindthenatureoftheproperty. Itisclear tome,on thebasisof theabove,that thebuilding sitesatAglandjia wereboughtbytheapplicantasaninvestment.. 10 Thefact thatshelateron,beforeproceedingtoherplans,found a betterinvestmentoramoreconvenientstructureforherneedsand decided tosell those properties in order tobuy the new investments,istomymind,acaseofsubstitutionofoneinvestment for . another and not acaseof trading in land, even though the said 15 propertiesweresoldataprofit. Theproperty inTersephanouwasagainboughtbytheapplicant, according to her own allegation, for purposes of investment ,andmore specifically for thepurpose of creating anorchard.Thegenuinessoftheapplicant on thisisagainevidenced 20 bythefactmattheapplicantproceededtoobtainpermitstosink wells.Thefact thattheapplicantdid notproceed,until 1978,to theerectionoftheorchard,mustnothavesomuchbearingonthe case,asalandownerisatlibertytopostponeorevenchangehis plans.Theproperty inquestionwasfinally soldin 1978for the 25 purposeoffinancingpartly thepurchaseof ahouseandaclinic bytheapplicant,atGladstonestreet,Nicosia,thatisitem

(5)earlierreferred to.This,inmyview,againamountstoasubstitution ofoneinvestmentforanother. Inthecircumstancesofthepresentcase,Ifindthatthe finding 30 by theCommissioner of anelement of trading in landwasnot warrantedandhisdecision shouldbeannulled. Havingfound asabove,Ifind itunnecessary todeal withthe questionsofsurchargeandinterestimposedontheapplicant. . 391 \ DemetriadesJ. Lerni v.Republic

(1988)In theresult,thisrecoursesucceedsandthesubjudiceassessmentsareherebyannulled. Therespondentstopaythecostsoftheseproceedings. Subjudice decision annulled. Respondentstopaycosts. 392