clr/1989/1989_3A_237.pdf

(2)of theLaw, questiondeterminedm theaffirmative— What isaFictitious transaction —Principlesgoverning interferencebyCourt In this case the applicant donated immovable property to his daughter One month later the donee sold half the share of the property and four months thereafter shesold the remaining half shaie The donee was.at all material times,resident in London She acted through a power of attorney to her father The proceeds of sale were withdrawn by her father together with the interest and were used byhim for hisown purposes The respondent decided that the transaction relating to the gift was fictitious HeproceededandassessedCapita!GainsTaxagainstthedonor (applicant) Hencethis recourse Having determined the question whethersection 36

(1)of Law4/78is applicableto thepresent caseintheaffirmative, the Court concludedthat inthecircumstances the decision wasreasonably open tothe respondent 237 Panayiotou v.Republic & Another

(1989)director. Recoursedismissed. Noorderforcosts. Casesreferredto: 5 Panayiotou v. Republic

(1986)3C.L.R.2311. T.Z.GuaranteeDevelopmentsLtd. v. Republic(19S6) 3CL.R. 381, 10 Pissarides v. RepublicandAnother

(1987)3C.L.R.

1. Recourse. Recourseagainstthedecisionoftherespondent toimposeon 15 applicant capitalgainstaxfollowing thedisposition of abuilding site at Latsia. Chr. Kitromilides. for the Applicant. 20 Y. Lazarou,Counsel oftheRepublicB,fortheRespondents. Cur. adv. vult. KOURRIS, J. read the following judgment. The recourse is 25 directed against the decision of the respondent, Director of Inland Revenue, to impose capital gains tax on the applicant following the disposition of abuilding siteat Latsia. Applicant was the registered owner of a building site under 30 Registration No.E841atLatsia. On 10.11.1984,she transferred the building siteto her daughter ChrystallaPanayiotou whois a permanent resident of London, by way of gift, and she is represented in Cyprus by her father by \irtue of a Power of Attorney. 35 On 11.12.19S4,Chrystalla,thedaughter,soldhalfshareofthe said building site for £4,000 and the remaining half share was sold on 19.4.1985 for£4,
2. 40 The proceeds from the first sale were deposited in the daughter's name on 13.12.1984 in the Co-Operative Credit 238 3 C.L.R. 5 Panayiotou v. Republic & Another Kourris, J. Society of Latsia andon24.7.19S5 were withdrawn by herfather together with the interest and were used by him for his own purposes. Theproceeds from thesecondsalewere depositedin the joint account of the daughter and her father and were subsequently withdrawn by herfather andwere usedby him for his own purposes. On 20.1.
3. the respondent charged the applicant capital gains tax on the gains accruing from the disposition of the 10 subject property to theamount of £394 for thefirst sale andto the amountof £534 for thesecond sale, taking theview thatthe gift to her daughter was a fictitious or an artificial transaction solely designed to reduceherliability to capital gains tax. 15 20 Applicant challenged the decision of the respondent on the ground that thetransfer of thebuilding site to her daughter was not a fictitious or an artificial transaction alleging that in the same period andinpointof fact on 15.9.1984; shetransferred by way of gift one-thirdshare to each of herthree children,of one flat Pallouriotissa under Registration ΝΌ.Β1055 at Arch. Makarios III Street No. 13, and also on 5.12.1984 she transferred by way ofgift toherdaughterConstantiaSocratous, a piece of land,plot No.524,theextent of which was 5donums, 2 evleks and 1,350 sq. ft at Latsia. 25 The point at issue is whether it was open to therespondent to treat the transfer of the building site by way of gift by the applicant to her daughter as fictitious.or artificial and disregard same. 30 35 40 Unders.36

(1)oftheAssessment andCollectionofTaxes Law (Law 4/78), the responded is empowered to disregard any transaction which is artificial or fictitious and was enteredinto or donesolelyfor thepurposeof reducingorextinguishing one's liability to tax. These provisions, as was cited in Theofano Panayiotou v. The Republic

(1986)3 C.L.R. 2311, are not limited in scope to assessments raised under the Income Tax Laws as the Assessment and Collection of Taxes Law is "an enactment intendedto make comprehensive provision for the effective enforcement of tax legislation generally". Thus,s.3

(2)provides: 239 Kourris, J. Panayiotou v. Republic & Another

(1989)'3.

(2)Οιαιδήποτεαρμοδιότητες.αι οποίαιδυνάμειτων διατάξείον του παρό\τος Νόμου.δύνανται να ασ/ηθώσιν υπό τουΔιευθυντού καιοιαιδήποτεαρμοδιότητεςαιοποί­ αι. δυνάμει των διατάξεωνοιουδήποτε ετέρου νόμου επιβάλλολτος οιονδήποτε φόρον.δύνανταινα ασκνβώοιν υπ' 5 αυτούείτευπότηνιδιότητα τουω;Διευθυντούείτευπότην ιδιότητα του ως Εφόρουτου τοιούτου φόρουδύνανται να ασχηθώσιπαραλλήλω;ή ταυτοχρόνωςδυνάμειτωνδιατά­ ξεων τουσυνδεδυασμένως δυνάμειτωνδιατάξεων αμφοτέ­ ρων.πάσαδεσχετικήειδοποίησις. κοινοποίησιςή κατάστα- 10 σις η οποίααπαιτείται ή δύναται ναδοθήή γενήυπ* αυτού δυνάμει οιασδήποτε των προαναφερθεισώνδιατάξεων δύ­ ναταιναγενήως συνδεδυασμένονέγγραφοκαιναυπογρα­ φή υπ' αυτούείτευπότηνιδιότητατουωςΔιευθυντού είτε υπό την ιδιότητα του ως Εφόρου είτε υπ' αμφοτέρας τας 15 ιδιότηταςταύτας." in English it reads:"Any functions which, under the provisions of this Law. 20 may be exercised by the Director and any functions which. under the provisions of any other Law imposing any tax. may beexercisedby himwhether inhiscapacity as Director or in his capacity as Commissioner of such tax. may be exercised concurrently or simultaneously under the 25 provisions of this Law and of such other Law or in a combined manner under the provisions of both, and any relative notice, communication or statement which is required or may be given or made by him under any of the aforesaid provisions, may be made as acombined document 30 in his capacity as Commissioner or inboth such capacities." Thus, it appears from the above provision that the respondent may. in administering orapplyingtheCapital Gains Tax Law;. exercise the functions entrusted to him by the 35 Assessment and Collection of Taxes Laws. The word "functions" is defined ins.3

(3)asmeaning"powersvestedin and duties imposed upon the Director or the Commissioner under the provisions of this law or any other law imposing any tax respectively." Section 31

(1)vests in the respondent the power 40 to disregard a transaction which, in his opinion, is artificial or fictitious. This power,therefore, is part of the"functions" which 240 3 C.L.R. Panayiotou v. Republic &Another Kourris. J. by virtue of the provisions of s.3

(2)of the Assessment and Collection of Taxes Laws are exercisable by the respondent concurrently or simultaneously or in a combined manner with the functions exercisable by him under the provisions of other 5 taxing enactments. The words "artificial" and"fictitious" have no definition but hardly anyone isneeded. It isfor the respondent to determine from his findings of primary fact the further fact whether there 10 was an act without any commercial or business purpose apart from atax advantage." In the case of T.Z. Guarantee Developments Ltd. v.The Republic

(1986)3 C.L.R.

1. it was held that it was not 15 necessaryfor thetransaction tobeunlawful orillegalinorder to be disregarded asartificial or fictitious but that it issufficient, if it was entered into or done only for the purpose of evading income tax. 20 Another caseon this topic is the case of Pissarides v. The Republic and Another (19S7)3C.L.R.
2. Counsel for the respondent contended that the transaction whereby the applicant gifted her land to her daughter was 25 exclusively designedfor thepurpose of tax evasion rather than theenrichment ofthedaughterbytheproperty gifted toher. He argued that this was obvious by the short period that the property remained in the daughter's ownership -for one month only -as wellasbythesubsequentuseoftheproceeds from the 30 sale which were used by her father for his own purposes. He submitted that in reality the applicant remained the true owner ofthelandandthegift ofthelandtothedaughter wasmerely to reduce the applicant's taxable liability by enabling the daughter to claim the exemption of £5,000 granted by s.5(l) of the 35 Capital Gains Tax Law. something which the applicant was unable to do having already exercised her right to such allowance on aprevious disposal. Counsel for the applicant, on the other hand, contended that 40 at the same period when applicant transferred the building site by way of gift to her daughter Chrystalla, she also transferred one third share to each of her three children of a flat at 241 Kourris. J. Panayiotou v. Republic &Another

(1989)Pallouriotissa and she also transferred by way of gift to her daughter Constantina Socratous,apieceoflandat Latsia,thus. maintaining that the applicant, during that period disposed to herchildrenbywayofgift,thegreaterpartofherproperty. He submitted that in these circumstances it could not be heldthat 5 the transfer of thebuilding siteto her daughter Chrystallawas madeinordertoreducehertaxableliability. Thequestion whichfallsfor determination iswhetherinthe lightoftheabovefactsitwasreasonablyopentotherespondent 10 to reachtheconclusionthat thegift ofthelandwasfictitious or artificial anddisregardsame. I aminclined to accept theargument oflearned counsel for the respondents that itwasreasonably open to theDirector of 15 theInlandRevenueDepartmenttoreachtheconclusionthatthe gift of the building site by the applicant to her daughter Chrystalla Panayiotou was fictitious or artificial and disregard same, in view of the fact that the transaction was exclusively designed for the purpose of tax evasion rather than the 20 enrichment of her daughterbythepropertygifted to her. And this,wasobviousbytheshortperiodthatthepropertyremained inthe daughter's ownershipaswellasbythesubsequent useof the proceeds from thetwosaleswhich wereusedbythe father forhisownpurposes. Itisfurther obviousfrom thefact thatthe 25 gift ofthebuildingsitetothedaughterwasmerelytoreducethe applicant'staxableliabilitybyenablingthedaughtertoclaimthe exemption of£5,000grantedbys.5(l)oftheCapitalGainsTax Law, something which the applicant was unable to do having already exercised her right to such allowance of a previous 30 disposal. Forthesereasonstherecourseisdismissedwithnoorderfor costs. 35 Recourse dismissed. No orderas tocosts. 242