clr/1989/1989_3A_269.pdf

(1)and 13— The provisions of section 11

(1)shouldbereadtogetherwithsection 13andinparticularwithparagraph (e)thereof—Remuneration ofdirectorofcompany limitedbyshares— Partonly allowedas deductibleexpense—Inthecircumstancesdecision reasonablyopen tothe director. Taxation—Income Tax—Assessment offacts—Interference by Court— Principlesgoverningsuch interference. 10 15 20 In this case, the Commissioner of Income Tax, having ascertained after inquiry that Mrs. Glykeria Kassinou - one of the directors of the applicants -wasnot rendering full timeservice to the company, that she had a close relationship with the other directors,that her services to the company could not exceed the value of £600 and that in any event by reason of her other duties in the family house, she could not render full time services to the company, did not allow a deduction of the wholeof her stated salary (£1,800),but allowed only£600. TheCourt heldthat inthecircumstances thedecision wasreasonably open to the respondent. Section 11

(1)for the aforesaid Laws should be read subject to theprovisions of section 13and, in particular paragraph 269 A. Kasinos Insur. Ltd v. Republic &Another

(1989)(e)thereof,which provides thai to be deductible the expenditure must be money wholly and exclusively sci out or expended for the purposes of acquiring the income. Thefact that thesaid director inherown declaration of tax stated her 5 incometobe£1S00isneitherherenorthere.Thepoint inissueiswhether the sum paid to Mrs. Kassinou was qualified in toto as a deductible expense for income tax purposes regarding the applicant company. Recourse dismissed with costs against 10 the applicant. Casesreferredto: Koussoumides r. Republic

(1966)3 C.L.R. IS. 15 Makrides v.Republic

(1967)3C.L.R.

1. Ceorghiadcsv.Republic (19S2) 3C.L.R.
2. 20 ManufacturersLife InsuranceLtd. v.Republic

(1967)3 C.L.R.460, Shoemex Limited v.Republic(19S7) 3 C.L.R. 407, Hadpsavva v.Republic

(1972)3C.L.R.

1. 25 Ionides v.Republic(19S2)3 C.L.R.
2. Recourse. 30 Recourse against the income tax assessment raised on applicants for the year of assessment
3. J. Typographosfor C. Tsirides, for the Applicants. Y. Lazarou,Counsel of theRepublic B.for theRespondents. Cur. adv.vult. KOURRIS, J. read the following judgment. By the present 40 recourse, applicant challenges the validity of the decision of the Commissioner of Income Tax contained in his letter of 270 35 3 C.L.R. A. Kasinos Insur. Ltd v.Republic &Another Kourris. J. 29.11.19S
4. whereby tax amounting to £529.
5. was imposed upon theapplicant companyinrespect oitheyearof assessment 19S
6. 5 Facts: The applicant is Andreas Kassinos Insurance Ltd. of Limassol, a private company of limited liability, registered on 16.7.
7. The authorised share capital of the applicant 10 company on 31.12.1980 was 10.000 shares of £1 each and its issued andpaidupsharecapitalwas 10sharesof£l eachheldby Andreas Kassinos.husband (7shares); Glykeria Kassinou. wife (1 share): Charalambos Kassinos (1 share) and Argyroulla Kassinou, (1 share), both children of the above shareholders. 15 Mr. Andreas Kassinos and Mrs. Glykeria Kassinou were also the Directors of the company. The applicant company derived its income duringthematerial time from commissions received from other insurance companies in respect of premiums on insurance contracts issuedtoclientsprocuredbythe applicants. 20 The accounts of applicants for the year 1980weresubmitted on 22.7.19S2.The profit and loss account was debited with £6.087 as Directors' remunerations, £4.261 for Andreas Kassinos and £1.826 for Glykeria Kassinou (wife). 25 On 19.7.1985,anotice of assessment for the year 1980was issued to applicant company for the purpose of collecting the tax shown in the computation submitted. This notice of assessment was accompanied with aletter informing applicants that theassessment wasbasedinitsown return andit wasliable 30 to revision by theexamination of the accounts. On 1.8.1985, a notice of assessment for the year 1980 was forwarded to Mrs. Glykeria A. Kassinou based on her own income tax return for the purpose of collecting the tax not in 35 dispute,i.e.on£1,800directors'remuneration declared plus£20 income on the assessed value of her residence.The accounts of the applicant company for the year 1979 and 1980 were examined in November, 1985 and among other expenses claimed, the point as to the appropriate charge for director's 40 remuneration was raised. The assessor who examined the accounts had information that Mrs.Glykeria Kassinou was not rendering full time services to the company and that in fact all 271 Kourris,J. A. Kasinos Insur. Ltd \. Republic &Another

(1989)business transactions were effected by Mr. Andreas Kassinos who hadthe knowledge and experience of an insurance agent due to his pre\IOUS employment with other insurance companies. 5 The examining officer earned out an inquiry whichshowed thatMrs.GlykenaKassinouwasnotafulltimeemployeeofthe company He visited the business premises of the company which were the same as the residence of the Directors, saw personallyMr AndreasKassinos,theManagingDirector,who 10 informed him that his wife does not issue any proposals for insurance contracts nordoessheprepare anyotherdocuments or issue any receipts or make any entries mthe books ofthe company, but that the only service rendered by her is the delivery of insurancecontractstothecompany'sclients. 15 The examining officer took also into account the fact that Mrs Glykeria Kassinou hadto look after the maintenanceof theirresidence andthelookingafter of theirtwochildren born in 1967and 1969 and she thus had no time left for rendenng 20 servicestothecompanion the basis of his findings, he submitted the case to the officer in charge of the distnet who adopted his decision to restnet the amount of remuneration relating to Mrs. Glykena 25 Kassinou from £1.826to£600only On29.11.1985,therespondentcommunicatedhisdecisionto amendtheincometaxcomputation fortheyearsofassessment 1979 and 1980 by letter addressed to the company's auditors 30 withacopytotheapplicantcompany,accompaniedbyanotice of assessment (appendix Dtotheopposition). Applicant company objected against theassessment for the year 1980throughtheirnewauditorsMessrs. Constantinou and 35 Economides,bytheirletterdated20.121985. Theauditorsgavethefollowinggroundsofobjection relating to therestnetion ofthe Director'sremuneration: 40 (a)theamountof£1,800wascreditedtohercurrentaccount bywayofsalaryfor theyear1980; 272 3 C.L.R. A. Kasinos Insur. Ltd v. Republic & Another Kourris, J. (

1. b)the amount of £1.800 could not be reduced as Mrs. Kassinou was working for the company up to 1984 and that she happenedtobe also Directorandshareholder; 5 (
2. c)Her contribution to the increase of the company's business was morethanthat of amere employee; (d)Thesalary of £150permonth was nothighfor aDirector of an insurancecompany; 10 15 20 (
3. e)The salary was not paid or drawn from her account during theyear 1980 but was drawn in 1981 andthatthe drawings were pan of £9,707 which were drawn by her husband during 1981. Similarly, hersalaries for the years 1981. 1982 and 1983 were transferred from her own current account to that of her husband,as it is shown in the accountsfor theyear 1983. On 5.2.1986.therespondentissued to theapplicant aNotice of Assessment for special contribution for the four quarters of the year 1980 (appendix F to the opposition). Applicant objected against thisassessment throughits accountantsMessrs. Constantinou and Economides by their letter dated 11.2.1986 which is attachedas appendix Gtotheopposition. 25 Applicant's objection was determined by the respondent's decision which was communicatedto the company by hisletter dated2.10.1986(appendix Ηtotheopposition),togetherwith a Notice of Assessment for the year of assessment 1980 and a 30 notice of assessment for special contribution for the four quaners of the year 1980. The reasons for which respondenthaddecidedto restrict the remuneration of Mrs.Glykeria Kassinou are the following:35 (
4. a)Shewas notrendering full-time services to thecompany andthustheamountinexcessof £6000was considered as not an expense wholly and exclusively incurred for the production of the incomeof thecompany; 40 (b)The payment of £1,800 director's remunerationwas not to be considered as a proper transaction in view of the 273 Kourris, J. A. Kasinos Insur. Ltd v.Republic &Another

(1989)close relationship between the Directors who had absolutecontrolofthecompanyandtheycouldtakeany decision theywished: (c)The amount of £1.800wasnot in fact salary asstatedin theletterof objection, asit wasnot paidmonthly andin fact itwasnotpaidatallin 1980oranysubsequentyears but it wastransferred tothecredit of theaccount of her husbandwhowasthecontrollingshareholder/director; (

1. d)Shedidnothaveanypastexperienceorknowledgeabout insurance business or transactions and the services she couldrendertothecompany,on apart timebasis,could not exceed the value of £600 including her duties as Director; (
2. e)Upon inquirymadebytherespondent,itwasdetermined that she could not render full time services to the company - apart from the information given by the ManagingDirectorthattheonlyservicesrenderedbyhis 20 wife werethose of deliveringinsurance contracts tothe clients-Mrs.Kassinouhadtolookafterthemaintenance oftheirhouseandherfamily. The applicant company,feeling aggrievedwith the decision 25 of the respondent Commissioner, filed the present recourse alleging, mainly that the respondent Commissioner failed to carry out due and proper inquiry', into the facts and circumstances of the present case and that the respondent Commissioner actedunderamisconception offacts and/orlaw; 30 alsothatthedecisionlacksduereasoning. The Law: Inviewofthepresumption oflegalityofadministrativeacts, 35 thesubjudiceassessmentsshouldbepresumedtobevalidunless the applicant succeeds to prove the contrary. In the caseof Koussoumides v. The Republic

(1966)3 C.L.R. 18, it was established that in a recourse to the Supreme Court under Article 146of theConstitution itison theapplicant on whom 40 liestheinitialburdenofproof tosatisfy theCourtthatitshould interfere with the subject matter of the recourse. This was 274 10 15 3 C.L.R. A. Kasinos Insur. Ltd v.Republic &Another Kourris, J. followed in the case of Rallis Makhdes v. The Republic

(1967)3 C.L.R. 147 at p.

1. In the case of Lillian Georghiades r. TheRepublic (19S2)3C.L.R. 659,at pp.
2. the Full Bench of the Supreme Coun has made it 5 abundantly clear that if the respondent's decision is one which was reasonably open to them, then this Coun will not disturb same. Furthermore, inincome tax cases it isexpressly statedin the relevant laws that the burden to satisfy the Court that an assessment isexcessive,isontheperson whoattacks same.(See 10 s.21

(2)of theAssessment andCollection ofTaxes Laws 19781979).Thislaw applies alsoto the special contribution casesby virtue of s.6 of Laws 34/78 and55/74. The issue which falls for determination in the present 15 proceedings is whether the amount which was shown in the applicant's account in 1979and 1980 as remuneration to Mrs. Glykeria Kassinou. a shareholder and director of the company, qualifies in toto as a deductible expense for income tax and special contribution purposes. 20 The legal provisions relevant to the issues under consideration arecontained in ss. 11and 13of the Income Tax Laws 1961-1981.Section 11

(1)deals with allowable deductions and provides, inter alia, that in ascertaining the chargeable 25 income of any person there shallbe deducted all outgoings and expenses wholly and exclusively incurred in the production of theincome. Thissection,however,shouldbereadsubject tothe provisions of s.13 which expressly prohibits certain deductions and in particular paragraph (e) which provides that to be 30 deductible the expenditure must be money wholly and exclusivelysetoutorexpendedforthepurposesofacquiringthe income. The expression "for the purposes of acquiring the income" 35 hasbeen thesubject ofjudicialinterpretation. One ofthesecase is Manufacturers Life Insurance Ltd. v. The Republic

(1967)3C.L.R. 460where Loizou, J.at p.471said: 40 Itclearlyappearsfrom theabovecasesthat for apayment to qualify asadeductibleexpensefor income tax purposes it may be a payment connected with the trade or business carried on and made in order to enable the taxpayer the 275 Kourris, J. A. Kasinos Insur. Ltd v. Republic &Another

(1989)better to earn' on his trade or business for the purposeof earningtheincomewhetherbygettingridofonerousservice agreementsorforthepurposeofmaintainingahighstandard ofbusiness." 5 Again, Pikis,J. stated in Shoemex Limited v.TheRepublic

(1987)3 C.L.R.407at409: "The colour given to a payment by the taxpayer is no basis for a deduction unlessthe facts viewed in thecorrect 10 perspective justify the deduction. Asobservedin Coates v. Arndele Properties Ltd. [1985]1 AllE.R. 15,thecolourin which facts are painted is never sufficient to justify a deduction.'" 15 Andatp.410hesaid: English cases cited by Mr. Evangelou suggest that payment madebythetaxpayertomembersofthefamilyor toaDirectorofacompanyonaccount ofloveandaffection 20 are not generally regarded as payments made for business considerations". In the present case, as is evident from the facts set out hereinbefore,theexaminingofficer carriedoutaproperinquiry 25 into the nature of the services rendered by Mrs. Glykeria Kassinou whichrevealed, interalia,that shedidnot render full timeservicestotheapplicant company,_thattheserviceswhich she did render were confined to delivering insurance contracts to the applicant's clients, that most of her time was spent in 30 maintaining herhomeandlookingafter theyoungchildrenand thatshehadneveractuallyreceivedtheremuneration whichwas shown intheaccountsin 1980andinsubsequent years,assuch remuneration was credited to her husband's account whowas thecontrollingshareholder andManagingDirector. 35 Consequently, I am of the opinion that under such circumstances, the respondent's decision to reduce the remuneration to be allowed as a deductible expense was reasonably open to him and the allegation of the respondents 40 that hefailed to carry out adueinquiryintothemattercannot stand. Theapplicants allegedthat therespondent-Director did 276 3 C.L.R. A. Kasinos Insur. Ltd v. Republic &Another Kourris, J. not take intoaccountthefact thatMrs.Glykeria Kassinou paid incometax onthesum of £1.836 andthattheapplicantspaidthe appropriate sum on this amount to the Social Insurance Fund. They raised this point to allege that there has been no due 5 inquiry into the matter. I am of the view that rightly the respondent Commissioner did not take into consideration the fact that Mrs. Kassinou paid income tax on the sum of £1,836 because it is entirely irrelevant to the point in issue which is whether the sum paid to Mrs. Glykeria Kassinou was qualified 10 in toto as a deductible expense for income tax purposes regarding the applicantcompany. Regarding the allegation that the decision lacks due reasoning, it appears to me that the decision contained in the 15 letter dated2.10.1986 (Appendix Ηto the opposition),fails to state the reasoning behind the decision. However, counsel for the respondents stated that this was due to an oversight and referred the Court to official records, extracts of which he attachedtohiswritten address where thedecision is adequately 20 reasoned. It has been held time and again that the reasoning behind a decision may be found either in the decision itself or in theofficial recordsrelatedthereto. (Georghios Hjisavva v. The Republic

(1972)3 C.L.R. 174, and lonides v. The Republic

(1982)3C.L.R. 1136). 25 In conclusion, I am satisfied that the sub judice decision is duly reasoned. Forall theabove reasons,therecourseis dismissedwith costs 30 against theapplicant. Costs tobe assessedby the Registrar. Recourse dismissed with costs againstapplicant. 277