clr/1988/1988_3_957.pdf

(2)(a)—Deductionfor wear and tear of property—The property should be ownedby theperson claimingthedeductionandshouldbeusedinhistrade duringtherelevantyearofassessment. Taxation—Income Tax—The Income TaxLaws 1961 -1983,sections 11

(1)and13—Deductionofinterest—The loaninquestionshouldhave beenapplied totheproduction ofapplicant's income.. Taxation—Income TaxLaws 1961-1983,sections 11

(1)and 13—Deduction ofinterest—Obligationtopay interestextinguished byLaw*—No question ofdeductionarises, Taxation—Income Tax—Sale ofLand—Profit therefrom—When liable to incometax—Principlesapplicable. Thesubjudice income taxassessments arechallenged on the following grounds, namely: *Section4

(1)oftheStrickenDebtors'(TemporaryProvisions)Laws 1979 -1985. 957 Konaris &Another v. Republic

(1988)a)Therespondentwronglyfailed toallowwearandtearinrespectofa buildingofthewivesofthetwoapplicantssituated inKyrenia.Thebuilding had been financed bya loanobtained by the twoapplicants from a Bank. b)Therespondentfailedtodeducttheamountoftheinterestchargedon thesaidloan. 5 Inaddition,applicantLarlidescomplainsthattherespondentwrongly consideredastaxabletheprofit,whichtheapplicanthadrealizedbythesale ofapieceofland,because,astheapplicantalleged,thelandhadbeenacquiredforinvestment. 10 Held,dismissingtherecourse.

(1)Thematterof wearandtearisgovernedbysection 12

(2)(a)ofthe IncomeTaxLaws 1961- 1983.Theword "property"isdefined insection 12

(1). Wearandtearallowanceisallowedinrespectofpropertywhich inthe firstplaceisownedbythepersonclaimingsuchadeductionandsecondly whichisusedandemployedinhistrade,duringtheyearofassessmentin question. Inthisinstance theproperty inquestion isownedbythewivesofthe applicants.Thefactthatsuchpropertymayhavebeenfinanced bymoney obtainedbytheapplicants,asalleged,doesnotalterthefactthatsuchpropertyisnotownedbythem. 2)Thedeductionofinterestisgovernedbysections 11

(1)and 13(e)of thesaidlaws.Thesubjudicedecisioniscorrect,becausetheloaninquestionwasnotemployed intheproductionofthetaxpayers'-applicant'sincomeand,also,becausetheapplicantswerestricken debtorsand,consequcntly theirobligation topayinterestfor theperiodasfrom 14.8.74was extinguished.* 15 20 25 3)Thetaxabilityofprofitsfrom thesaleoflandmustbedecidedinthe lightoftheparticularcircumstancesofeachcase.Ifatransactionisfoundto be"anadventurein thenatureoftrade"suchprofits aretaxable.Isolated 30 transactionsthoughoftenmaylackthefeaturesoftradedonotprecludethe possibilitythatsuchtransactionmaybeinthenatureoftrade. *TheDebtors'Relief(TemporaryProvisions)Law1979-1985,section4

(1). 958 3 C.L.R. Konaris & Another v. Republic Theapplicantfailed toestablishthathisversionofthefactsisthecorrect one. Recoursedismissed Noorderastocosts. e Casesreferredto: Union ColdStorage Co.Ltd. v.Jones (InspectorofTaxes),8TaxCases, 725; CorporationofBirminghamv. Barnes (HM.InspectorofTaxes), 19Tax Cases214; 10 Triantafyttidesv.NationalBankofGreece

(1983)1 C.L.R.469; CyprusHotelsLtd. v.TheRepublic

(1985)3 C.L.R. 2772; Agrotisv. CommissionerofIncomeTax, 22C.L.R. 27; HjiEraclisv. CommissinerofIncomeTax

(1984)3 C.L.R. 604; Varnavidesv.TheRepublic

(1986)3C.L.R.

1. ,,- Recourses. Recoursesagainsttheincometaxassessmentsraisedonapplicantsfortheyearsofassessment 1975-
2. C.MelaswithChr,Demetriou,fortheapplicants: Y.Lazarou,for therespondents. 20 Cur. adv. vult. A.LOIZOU P.read the following judgment. By thepresent recourses which were heard together as they present common questionoflawandfact,theapplicantsclaimadeclarationofthe Court that theincome taxassessments raised bytherespondent 950 A. Loizou P. Konaris & Another v. Republic

(1988)Commissioneragainst theapplicantsarenullandvoidandofno legaleffect whatsoever. ApplicantGeorghiosKonariswhoderivedhisincome,during thematerialtimes,fromshareofprofitfromthepartnership"LarticonSyntheticDetergentsCompany",rentsandasfrom theyear 5 1980 Social Insurance pension, filed recourse No. 378/85 as against the income tax assessment for the years of assessment 1975to

1. ApplicantSocratisLartideswhoalsoderivedhisincome,during thematerial times, from theprofits as apartner of thefirm 10 "LarticoSyntheticDetergentsCompany"andasfrom 1981 Social Insurance pension,filedrecourse No.379/85as against theincome taxassessments for theyearsof assessment 1975to 1981 and
2. Therespondent Commissionerdid notacceptthereturnsand 15 accounts submitted by the applicants inrespect of the yearsin questionandraised assessmentsaccording tohisjudgment asis providedbysection 13

(2)(b)oftheAssessmentandCollectionof TaxesLaw, 1978(LawNo.4or 1978).Againstsuchassessment theapplicantsfiledobjectionsastheyfoundthattheywereexces- 20 siveandnotinaccordancewiththechargeableincomedeclaredin theirreturnsofincome. Therespondent Commissioner examined thematterandproceeded with the determination of the assessments, as against whichtheapplicantsfiledtheserecourses. Itwascontended thattherespondentwronglydecidedtodisallow (a)wearandtearallowanceinrespectof abuildinginKyreniaownedbythewivesoftheapplicantsand(b)interestcharged on loanscontracted priortothe 14thAugust 1974bytheapplicantsandtheir wivesfor thepurposeoffinancingtheconstrue- 30 tionofthelatter'sbuilding. Thesaidbuilding,acomplexoftouristappartmentswasbuilt 960 25 3 C.L.R. Konaris & Another v. Republic A. Loizou P. between 1973and 1974inKyreniaonaplotownedby 1/2 share each by thewivesof theapplicants.Asit isclaimed, 1/2 of the costof suchbuilding wasfinanced bymeansof aloanobtained from GrindlaysBankbytheapplicantstotheextentof 1/2 share 5 each. It was contended therefore that since the said buildings wereineffectfinancedandpaidfor bytheapplicantsthattherespondentCommissionerwronglydisallowedwearandtearallowanceinrespectofsuchbuildings,andsecondlyfor thesamereason, that he wrongly disallowed a deduction of the interest j 0 chargedontheaforesaidloan. Thematterisgovernedbysection 12

(2)(a)oftheIncomeTax Laws1961 -1983whichprovidesasfollows: 15 "

(2)In ascertaining the chargeable income of any person engagedinatrade,business,profession,vocationoremployment,thereshallbeallowed- 20 (a)subjecttotheprovisionsofthissection,adeductionofa reasonable amount for the exhaustion and wear and tearof propertyarisingoutoftheuseandemploymentofsuchproperty in the trade, business, profession, vocation or employmentduringtheyearofassessment:" and "property"isdefined by section 12

(1)thereof as "plant, machinery or buildings owned by a person engaged in a trade .... and used and employed by such person in such trade 25 30 Ascorrectlyarguedonbehalfoftherespondentswearandtear allowance is allowed in respect of property which in the first placeisownedbythepersonclaimingsuchadeductionandsecondly whichisusedandemployedinhistrade,during theyear of assessment in question. Support for this view may also be found in the English case of UnionColdStorageCo.Ltd. v. Jones(InspectorofTaxes), 8TaxCasesp.725at736. 961 A. Loizou P. Konaris & Another v. Republic

(1988)"Ithas tobe wear and tearof machinery andplant used for thepurposeof thetrade and belonging totheperson by whom itis carried on:it must be usedfor thepurpose of thetradeof the Appellant Company. All Ican say is, the machinery and plant is not. I think 'used for the purpose of the trade of the 5 Appellant Company' means that the Appellant Company are making profits by using andcausing thewear and tearof the machinery. That is what I think the scope of this is. This is used inthe tradeof theothercompany andofcourseprima facie the depreciation of the plant and machinery cannot be al- .„ lowed as a deduction: it has got to be brought within these words which create the allowance, and, if it is not within the words, it isnot within thewords.Itcannot beallowed on general principle: the words 'used for the purpose of trade' must be satisfied, andall Ican sayisIdonot think theyare." J-*J This decision was upheld by theCourtof Appeal whereitwas held atp.738 (supra) as follows: "Deductions may be allowed in respect of money wholly and exclusively laid out or expended for the purposes of the trade, manufacture orconcernof thesubject making thereturn ~ 0 for Income Tax purposes. It isplainly seen by reading those wordsthatitisnotallmoneythatislaidoutbythesubject but only money which is laid out, first of all, for thepurposes of the trade, and, secondly, laid out wholly and exclusively for thepurposes of the trade, andunless theexpenseincurred can be brought within these words which are narrow words the deductions cannot be allowed. Itisquiteplain theintentionof theLegislature wasnot tomakeabroadgeneralrulethatwhatever a subject likestoexpend inhisbusinesscould bededucted butonly such sumsweretobeallowed towhichthecharac- 30 ter could be assigned that they had been wholly and exclusively laid out for the purposes of the subject's business." In thisinstancethepropertyinquestionisownedbythewives of the applicants. The fact that such property may have been fi- 35 962 3 C.L.R. Konaris & Another v. Republic A. Loizou P. nancedbymoneyobtainedbytheapplicants,asalleged,doesnot alterthefact that suchpropertyisnotownedbythemandtherefore,inthecircumstancesIfindthatitwascorrectinlawtherespondentCommissionertodecide,ashedid. 5 10 Before concluding I wish to refer to the following passage from thecaseofCorporationofBirminghamv.Barnes(H.M.InspectorofTaxes), 19TaxCases214at217: "Whatamanpaysforconstruction orfor thepurchaseofa work seems to me to be the cost to him; and that whether someonehasgivenhimthemoneytoconstructorpurchasefor himself,orbeforetheeventhaspromisedtogivehimthemoneyafter hehaspaidforthework,orafter theeventhaspromised or given the money which recoups him what he has spent." 15 Asfarasthequestionofinterestchargedontheloanbytheapplicants for the purpose of financing the construction of their wives' property is concerned, I consider that the respondent Commissionercorrectlydecidedthatsuchisnotdeductible.The matterisgovernedbysections 11

(1)and 13(e)oftheIncomeTax 20 Laws1961-1983whichprovideasfollows: "11.

(1)Forthepurposeof ascertaining thechargeableincomeofanypersonthereshallbedeductedalloutgoingsand expenses wholly andexclusively incurred by such person in theproductionoftheincome," 25 and, "13.Forthepurposeofascertainingthechargeableincome ofanypersonnodeductionshallbeallowedinrespectof- (e)anydisbursementsorexpensesnotbeingmoneywholly andexclusivelylaidoutorexpendedforthepurposeofacquir963 A. Loizou P. Konaris & Anoher v. Republic

(1988)ingtheincome;" The provisions of thelaw areclearandsincein thisinstance the loan in question wasnotemployed in theproduction of the taxpayers' - applicants' income,equally anyinterest payableon suchloancannotbeconsideredasdeductible. 5 Secondly,accordingtotheapplicants'auditor,nointerestwas in fact paid in respect of the loaninquestion since 1975onthe ground thatboththeapplicantsandtheirwivesarestrickendebtors.Thisallegation wasneitherdisputedbytheapplicantsnordenied,soitmustbetakenascorrect. 10 Inaccordance withtheprovisionsofsection4

(1)oftheDebtor'sRelief (TemporaryProvisions)Laws 1979- 1985adebtor's obligation topayinterestiscompletely abolished after 1974and aslong astheabnormal situationcontinues,See: Triantafyllides v.NationalBankofGreece

(1983)1 C.L.R.469at476;Cyprus 15 HotelsLtd. v.Republic

(1985)3C.L.R.2772,whereitwasheld atp.2778: "Consequently, sincetheliabilityoftheapplicantcompanyto payinterestiscompletelyextinguished,theamountofsuchinterest cannot be allowed as adeductible expense, asit nolonger 20 constitutesanamountdueandis,therefore,taxable." In the result recourse No. 378/85 fails and is hereby dismissed. AsfarasrecourseNo.379/85isconcernedthereremainsone further pointtobeconsidered. Applicant Lartides alsofurther contended thatan amountof £3,000.-ofprofit realised byhimfromthesaleoflandatLatsia was not taxable as the amount wascapital profit and not profit arisingfromanadventureinthenatureoftrade.Heclaimedthat the said land wasbought for thepurposeof settinguptherein a 30 chocolate factory but ashewasunabletoobtain aloanfromthe 964 25 3 C.L.R. Konaris & Another . Republic A. Loizou P. Banktofinancetheproject,hewasobligedtoselltheland. Accordingtothecontractofsalethesaidland waspurchased on the 13th June 1976by acertain Georghios Georgakakis for thetotalamountof£10,500.-.Atsomesubsequentdate-which 5 wasconsidered bytherespondentCommissioner asthe4.11.76, thedateofthetransfer of theland -theapplicant becameacoownerby 1/2shareintheland.ltisfurther allegedbytherespondents that the application for the financing of the project was madeonthe3.7.76bythesaidGeorgakakisaloneandsuchwas 10 turned down by theBank on the 11.9.76long before theapplicant bought his 1/2 share in the land. This does not appear to havebeendeniedbytheapplicant. Thegeneral principleisthatthetaxabilityofprofitsfromthe saleoflandmustbedecidedinthelightoftheparticularcircum15 stancesof each case. (See:Agrotisv.Commissioner ofIncome Tax, 22C.L.R.27.) Andif atransaction isfound tobe."anadventurein thenatureof trade"such profits aretaxable.Isolated transactions thoughoften may lackthefeatures of tradedonot precludethepossibilitythatsuchtransactionmaybeinthenature 2Q oftrade. ThegeneralprinciplesconcerningthismatterappearextensivelyinthecaseofHjiEraclisv.CommisionerofIncomeTax

(1984)3 C.L.R. 604 at 612-615, Varnavides v. Republic

(1986)3 C.L.R. 1385.1needtherefore notrepeatthem.Sofarastheyap2% Ply t o t n e f a c t s °f t n e presentcase,Iconsider that theapplicant hasfailed toestablish that hisversion ofthefacts isthecorrect oneandIfindtherefore thatinthecircumstancesthiswasanadventure in the nature of trade and theprofits arising therefrom werecorrectlyconsideredastaxable. ™ EvenifIweretoaccepttheapplicants'versionthathebought thelandforthesolepurposeofbuildingthereinachocolatefactory,andsinceasheallegestheonlyreasonfordisposingtheland wasthefactthattheprojectfellthrough,Iconsideritunlikelythat theapplicantwhoappearsto.beaversatilebusinessman involved 965 A.Loizou P. Konari &Another v.Republic

(1988)either directly or indirectly in more than one typeof business, couldnothaveforeseen theprobabilityoftheBankturningdown hisapplication foraloan.Thisleadsmetotheonlyobviousconclusionthatthelandwasnotacquiredasaninvestment. Inanycasehavingconsideredtheposition asputbeforeme,I 5 find thattheapplicanthasfailedtoconvincemethatthesubjudice decision must bedisturbed asonthefacts Ifindthatit wasreasonably opentotherespondent Commissionertoreach theconclusion that thetransaction wasinthenatureoftrading inland. Thecircumstances heacquired theland andtherelevantly short JQ timeheheldonitisnotcharacteristicofaman,alandownerwho havingfound hispropertyappreciatinginvaluesellspartofitand utilisestheprofitsinordertofurtherdeveloptheremainder. Forthereasonsstatedaboveboththeserecoursesfail andare herebydismissed,butinthecircumstancestherewillbenoorder astocosts. ^ Recoursesdismissed. Noorderastocosts. 966