clr/1989/1989_3A_199.pdf

(1)— Interference by Court— Principles applicable 5 10 15 20 ConstitutionalLaw — Taxation — Constitution,Art 24 — TheCollection andAssessment of Taxes Law, 1978-1979, section 36

(1)— It does not m any way offendagainstArt. 24.2 of the Constitution The applicant, is a qualified and authorised accountant-auditor During 1973 aprivate companylimitedby shares was incorporated with a share capital of 40 pounds,divided into 40 shares of £1 each, of which the applicant held 1, applicant's wife 1, applicant's daughter 1 and applicant's son 37shares During 1980 thecompany increased its capital to 100pounds The60new £1 eachshares were allotted at par equally to three persons as follows, le 20 shares to each of the m-laws of the applicant's daughter and the remaining 20 shares to one Eleni Chnstophorou Laterin December 1980thenew shareholders transferred by way of gift these shares to theapplicant's grandchildren On 31st December 1980 the company decided to divide its whole incomefor the year 1980 as dividend to its shareholders, who, otherwise, did not have a taxable income. It was ascertain that the company's 199

(1989)Ionides v. Republic income was derived by theactivities of the applicant himself The applicant was the only person, who could render the services m question, but did not receive any salary Thewhole income ofthe company wasdistributed tothe shareholders 5 In thesecircumstancestheCourtfound thatitwas reasonablyopen for theCommissioner of IncomeTax to find that theset-up ofthe company was fictitious, resulting in artificial diminution of the applicant's income. Inthelightoftheabove finding andoftheprinciple enunciated inthe secondoftheabove Headnotes.the Courtdismissed 10 therecourse Recourse dismissed withcosts against applicant. 15 Casesreferredto Kmgsfield v. Republic

(1966)3CL.R. 45. HadjiEraclis andAnotherν Republic

(1984)3CL.R604, 20 Τ. Ζ Guarantee Developments Ltd v.Republic

(1986)3CL.R. 381, Kynakides v.CounsilforRegistration ofArchitects andCivil Engineers

(1965)3C.LR. 151, 25 Five Bus ToursLtd v.Republic

(1983)3CL.R793. Prodromou v.Republic

(1986)3 CL.R. 1540. Recourse. 30 Recourse against thenew assesments raised on applicant's chargeable incomefortheyearsofassessment 1978-1981 and to raise new assessments of the special contribution payable by himonthebasisoftheaboveassessments ofhisincome. 35 A. Dikigoropoulos, forthe Applicant. A. Evangelou,Senior Counsel of the Republic, for the Respondent. Cur. adv.wit. 200 40 3 CL.R. lonides v.Republic DEMETRIADES. J. read the following judgment. By this recourse the applicant praysfor a declaration that: 5 10 15 "(a)The act and/or decision of the respondent to raise new assessment on applicant's chargeable income in respect of the years of assessment 1978 - 1981, as set out in respondent's letter datedthe 19th September, 1985,and inthenotices ofthedetermination of objection attached thereto and also dated 19th September, 1985,isnull and voidandofnoeffect whatsoever asbeingcontrarytothe provisionsofthelawand/oroftheConstitution and/oras having been made or taken in excess and/or in abuseof the powers vested intheCommissioner of IncomeTax. (b)The act and/or decision of the respondent to raise new assessment of the special contribution payable by applicant on the basis of the aforesaid assessments of applicant's income is null and void and of no effect whatsoe\'er'\ 20 The applicant, who is a qualified and authorised accountantauditor, derives his income from hispractice, emoluments from employment assecretary to various companies, dividends,rents andpensions. 25 On the 22nd May, 1973, a private company with limited liability was incorporated under the name of NIDI Secretarial ServicesLtd.(hereinafterreferredtoasthecompany)withashare capital of£40.-dividedinto40£1.-shares. 30 At the time of its incorporation, the share holders of the company weretheapplicantholdingone

(1)share,theapplicant's wife andhisdaughterMrs.Kountouri,eachholding one

(1)share andhisson,wholivesabroad,holdingtheremaining 37shares. 35 Onthe24thNovember,1980,thecompanyincreaseditsshares .from 40to 100£1.-shares. The60newshareswerethen allotted equally,that is20sharestoeach ofthein-lawsontheapplicant's daughter Loizos and Myrofora Kountouris and a certain Eleni 40 Christoforou at par. On the 27th December, 1980, the new shareholders 201 Demetriades,J. lonides v.Republic

(1989)transferredbywayofgiftthesharesallottedtoeachoneofthem to thethreechildren ofthe daughteroftheapplicant,that ishis grandchildren. Onthe31stDecember, 1980,thecompanydecidedtodivide 5 itswholeincomefor theyear 1980whichamountedtothesum of£1,440.-asdividend. Inotherwords,andhavingregardtothe fact thatthe60shareswereallottedand/orsoldand/orgifted to the new shareholders at par, yieldedin one month areturn of 240percentum. 10 It is to be noted that none of the new shareholders or the grandchildren of the applicant had income which wastaxable; that nooffer wasmadetothesonwhowasthemainshareholder in the company to buyanyofthenew shares andthat thereis 15 no decision ofthe Boardof Directors of thecompany to offer thecompany'ssharestonon-shareholders. The company had been filing income tax returns regularly andhadbeen assessedto incometaxwhichitpaid. 20 Byaletterdatedthe19thJune,1982,copyofwhichisexhibit No.l to the application, the Commissioner of Income Tax requested the company's auditors for certain particulars with regard to the company's clients, evidence showing the 25 appointment of the company as secretary to the clients, the names ofthecompany's employees andtheremuneration paid to them. Tothisletter thecompany's auditors repliedbytheir letter dated the 24th October, 1983,copy of which is exhibit No.2totheapplication.Asitappearsfrom thisletter,thework 30 of the company was being carried out by the directors of the company who had decided to render their services to the companygratis. Byhisletterdatedthe7thAugust, 1984(exhibitNo.3tothe 35 application), the Commissioner of Income Tax informed the company's auditors that in his opinion the profits of the company in each year since its incorporation ought to be assessedontheapplicantfor thefollowingreasons: 40 (

1. a)The services rendered by the company were actually rendered by the applicant as no other shareholder or 202 3CL.R. lonides v.Republic Demetriades, J. directorofthecompanycouldrendertheservices offered bythe company. 5 10 15 20 25 30 35 40 (b)Theapplicantbeingtheonlyperson whocouldrenderthe servicesinquestion didnot receiveanysalaryandalmost the whole of the income of the company was distributed to theshareholders. (
2. c)The major shareholders were three under aged grandchildren of the applicant. (
3. d)Applicant's income had been reduced by acts and transactions whichwere artificial andthat in accordance with the provisions of section 36 of the Assessment and Collection of Taxes Laws 1978-1979 were disregarded andwereconsideredasincomeofthe applicant. By their letter dated the 22nd September, 1984, copy of which is attached to the application as exhibit No.4, the company's auditors objected to the decision set out in the Commissioner's letter of the 7th August, 1984, explaining that the statement of the Commissioner that the company rendered professional services through the applicant only and that no other shareholder or directors of"the company could render those services was, in the light of the true facts and circumstances, incorrect inthat, asstated in his letter dated the 24th October, 1983(exhibit No.2to theapplication), the work was carried out by all the directors including Mrs. lonides and Mrs. Kountouri andthey reiterated applicant's contention that the acts and/or transactions under which the shares came to be acquired by the son and grand-children of the applicant were very real transactions between the company and independent individuals offull ageandcouldnotbeconsideredasartificial by reason oftheprovisions ofsection 36

(1)oftheAssessment and Collection of Taxes Laws 1978-1979. By the same letter the company's auditors requested the Commissioner to refer them to decidedcasesuponwhichhebasedhisdecisiontoconsiderthe transactions in question artificial andthe authority whereunder directors of a company are prohibited from rendering services to acompany gratisandwithout claimingany remuneration. By a letter dated the 19th September, 1985, which was 203 Demetriades.J. lonides v.Republic

(1989)addressed to the applicant personally, the Commissioner of IncomeTax informed himthathewasnot prepared tochange his decision which was set out in his letter of the 7th August. 1984. Intheletter of the 19thSeptember, 1985,notices ofthe determination oftheobjection oftheapplicantinrespectofthe 5 yearsofassessment 1978

(77),1979

(78),1979,1980and1981,as wellasanoticeofpayment ofspecialcontribution onthebasis of the aforesaid newassessments,wereenclosed. By this letter the Commissioner of Income Tax further 10 allegedthat theincorporation ofthecompany wasameansof transferring incomefrom theapplicant'spracticetomembersof hisfamily inthat thecompany'sbusiness depended entirelyon theapplicant;itsincomewasderivedfromtheallocationtoitof suchproportionoftheapplicant'sbusiness,theincomeofwhich, 15 when distributed as dividends, would be below the untaxable incomeofashareholder.Finally,theCommissionerpointedout thatremunerationfortheservicescarriedoutbythedirectorsof the company, who were employed by the applicant in his practice,oughttohavebeenchargedtothecompanyandnotto 20 theapplicant'spractice. Having the above inmind,theCommissioner informed the applicant by his saidletter that it wasevident that the scheme was artificial and that it was devised solely for the transfer of 25 income whichbelongedtotheapplicanttohisgrandchildrenin orderto avoidpayment ofincometax. ThedecisionoftheCommissionerofincomeTax,whichwas communicated to the applicant by the letter dated the 19th 30 September, 1985,isnowchallengedbythepresentrecourse. Theargumentsofcounselfortheapplicantinsupport ofthe complaints ofhisclientmaybesummarizedasfollows: 35 (a)Therespondent actedunderamisconception offact and lawastowhatisanartificial and/orfictitious transaction and that he did not conduct a due inquiry in order to ascertainthecorrectfactsofthecase. 40 (b)In view of Article 24.2 of the constitution, any tax imposedbyalawmustbedefined withcertaintybysuch 204 3 CL.R. 10 20 25 30 35 40 Demetriades, J. law andany discretion thattheCommissioner of Income Tax may have in assessing such tax should be exercised objectively so that a decision reached thereundershould be objectively correct andtrue. Underthishead,it isthe contention of counsel that section 2

(1)of Law 4/78 provides thattheamountof tax should be ascertainedon the basis of objective criteria laid down in the Law and not the subjective views of the respondent; that there is no room for the exercise of discretionary powers in tax matters where the tax payable must be fixed by the law and that any legal provision to the contrary offends against Article 24.2 of the Constitution. 5 15 lonides v. Republic (c) Thesub judice decision was taken in violation of the rule of naturaljustice inthatnomanwillbe ajudgeinhisown cause. It has time and again been said in anumber of judgments of this Courtthat the Courtwill not interfere with the decision of an administrative organ if suchdecision was reasonably opento it and that an applicant in a recourse under Article 146 of the Constitution has theburden of proof to establish thatthe organ exceeded the outerlimits of its powers. The ligislative provision on which the Commissioner of IncomeTax based hisdecision inthiscase is section 36

(1)of the Assessment and Collection of Taxes Laws 1978-1979 which reads: l, 36.-(l) ΟσάκιςοΔιευθυντήςκρίνειότιαναφορικώςπρος φορολογικόν τι έτος το αντικείμενον φόρου οιουδήποτε προσώπου μειοΰταιεκπράξεων αίτινες, κατά τηνγνώμην αυτού, δεν είναι γνήσιαι ή είναι εικονικαί, δύναται να αγνόηση οιανδήποτε τοιαύτην πράξιν και ναφορολόγηση τα ενδιαφερόμενα πρόσωπαεπί του ορθούαντικειμένου φόρου." ("Where the Directoris of the opinionthatin respect of any year of assessment the object of the tax of any person is reducedby anytransactionwhich inhisview was artificial or fictitious, he may disregard any such transaction and assess the persons concernedontheproper object of the tax.") 205 Demetriades,J. lonides v.Republic

(1989)The above provision received judicial interpretation ina number ofcases (seethecases ofKingsfield v.TheRepublic

(1966)3 CL.R. 45; HadjiEraclis and Another v. The Republic

(1984)3 CL.R.604;Γ.Z. GuaranteeDevelopments Ltd. v.The Republicthrough theCommissionerofIncome 5 Taxof theMinistry of Finance

(1986)3CL.R.381). In the latter case (atpp. 386 -387)Stylianides,J.said: "'Artificial' and 'fictitious* have no definition but hardly anyoneisneeded. Itisfor therespondenttodetermine from 10 hisfindings ofprimary fact thefurther fact whetherthere was an act which wasnotreal,an actwithout any commercial or business purpose apart from a tax advantage. The respondent unders.36(l)is empowered tocome tothe 15 opinionthatnotthewholetransactionbutapartorconditions ortermsofthetransactionare artificial orfictitious.Itis not necessary for the transaction tobeunlawful orillegal. It is sufficient ifitwas enteredintoordoneonlyforthepurposeof evading thepaymentofincometax." 20 As it emanates from theabove cases theposition of the Courtisthatifitwas reasonably opentotherespondenttofind, on thematerial before him,thattherewasan actwhich had no commercial or business purpose except tax avoidance as its 25 ultimateresult,theCourtwillnotinterfere with suchdecision. As it appears from the facts placed before me both in the application and the opposition toit,the written addresses of counsel,aswell astheaffidavits filed andtheanswers given by 30 the affiants in their cross-examination, I have come to the following conclusions:(a)The company's income was derived from business that was channelledtoitby the applicant's practice,i.e.the 35 applicanthimself. (b)The company hadnorunning expenses as these were bornbytheapplicantandwerechargedasexpenses ofhis practice. (c)Thedirectors ofthecompany,forreasons thatwerenot 206 40 3CL.R. lonides v.Republic Demetriades, J. given to me, rendered their services gratis and thus the emoluments towhichtheywereentitled wereincludedin the profits that the company made and which were distributedtoits shareholders asdividends. 5 10 (

1. d)The share capital of the company was in 1980increased by the.issue of 60 shares of the value of £1.-each and theseshareswerenot offered tothethen shareholdersbut were sold and/or given at par to third persons of no taxableincome;and 15 (
2. e)the new shareholders transferred by gift the shares so acquired by them to the grandchildren of the applicant, approximately onemonth after theyhadbeen transferred to them. Having considered the arguments of counsel in the light of the evidence adduced, Ifindthat it was reasonably open to the Commissioner, on the material before him,to arrive at the sub 20 judice decision andthis Court cannot interfere with the exercise ofhisdiscretion. TheCommissioner inexercisinghisdiscretion, had allthefacts before him andthere isno room in my mind to hold that he was labouring under any misconception of fact or law. 25 Regarding the second argument of counsel, that there is no room for discretion intaxinglawsandthat anyprovision tothat effect is contrary to Article 24.2, I find no merit in it. The unconstitutionality of a legal provision has to be specifically 30 pleaded andproved beyond any reasonable doubt. Counsel has not specifically indicated which provision he considers unconstitutional. In any event, if one assumesthat herefers to theprovision ofsection 36

(1)(whichhasbeen citedbefore), Ido not really see how does this provision offend against Article 35 24.2 which reads asfollows: "2. No such contribution by way of tax, duty or rate of any kind whatsoever shall be imposed save by or under the authority of alaw." 40 Income tax is imposed on the authority of the Income Tax Laws and the amount of tax payable is assessed on the criteria 207 Demetriades, J. lonides \. Republic

(1989)set out therein. The discretion given totheCommissioner does not concern either the kind of tax or the amount of tax.but is with regard to transactions leading to tax avoidance. If this is the case,he willconsider whethersuchtransactions are genuine or artificial andfictitious. AsIsaidearlier,Icannot seehowthis 5 provision offends against Article24.2of the Constitution. As a result, this contention of counsel for the applicant is dismissed. 10 Whatremainstobeconsideredisthelastargument ofcounsel referring to the alleged breach of the rule of natural justice that '"noman shallbe ajudgeinhisown cause". As it has been stated in anumber of cases,this rule has no 15 application in the case of bodies or organs exercising administrative and not judicial or quasi-judicial functions, (see Kyriakides v. The Counsil for Registration of Architects and Civil Engineers

(1965)3CL.R. 151,at p. 159; Five Bus Tours Ltd. v. The Republic

(1983)3 CL.R. 793 at p. 809: 20 Prodromou v.TheRepublic

(1986)3CL.R. 1540.atpp.1547, 1548).In thelattercaseawritten examination washeldbetween candidates eligible for appointment to the post of Commercial Officer. As aresult of acomplaint lodgedbythe applicant, who failed to obtain 50or more marks,hisexamination papers were 25 referred forre-examination bythesameexaminer. A.Loizou,J., as hethen was.held at p. 1548,after making reference to other authorities,that: "Iwouldconsider inthepresent casethat thefunctions ofthe 30 examiner were neither judicial nor quasi-judicial and in the circumstances the rules of natural justice have not been infringed." Inany event, in thepresent case,the objection lodgedbythe 35 applicant wasnot byway ofahierarchical recourse,which must be heard by a hierarchically superior organ, but was a mere objection to the person who took the provisional decision, which didnot become finalized until the objection washeard. 40 In the result, this recourse fails andishereby dismissed. 208 3 CL.R. lonides v.Republic Demetriades, J. In the circumstances of the case. I make an order that the applicant paysthecostsoftherespondent. Coststo be assessed by the Registrar. 5 Recourse dismissed with costs againstapplicant. 209