clr/1989/1989_3A_393.pdf

(1989)of the question whether an activity constitutes trade. The following however arc relevant: Thecharacter of thelandpurchased,thestateofdevelopment and future potential, the manner of the finance of the transaction, the 5 business knowledge of thetax payer, the length of the ownership, the frequency ofthe transaction orother transactions,the objects of a company as contained in its Memorandum and Articles of Association. The intention to trade maybegathered from agreat variety of facts and circumstances." 10 As,intheopinion oftheCourt,thesubjudicedecision wasreasonably open to the respondent, the recourse was dismissed. Recourse dismissed. No order as to 15 costs. Casesreferredto: 5awas M. Agrotis Ltd. v. CommissionerofIncome Tax22 C.L.R. 27, 20 Droussiotis v.Republic(MinisterofFinanceandAnother)

(1967)3C.L.R. 15, Philippou v.Republic (19S3) 3 C.L.R. 1836, 25 Makrides v.Republic (Minister ofFinance)

(1967)3 C.L.R. 147, HadjiEraclisandAnother v.Republic

(1984)3C.L.R. 604, 30 Ignatiou andAnother v.Republic

(1989)3C.L.R. 346, Edwards(Inspector of Taxes) v. BairstowandAnother [1955} 3Ail E.R. 48, 35 Georghiadesv.Republic

(1982)3C.L.R. 659, Mangli v.Republic

(1983)3 C.L.R. 52, CaliforniaCopper Syndicate (Limited andReduced) v. Harris(Surveyor 4 0 ofTaxes)5T.C. 159, 394 3 C.L.R. CD. HayProp.Ltd v.Republic & An. Cay/er, Irvine & Co Ltd ν Commissioners of InlandRevenue, 24 ΤC 491 Recourse. 5 Recourse against the income tax assessments for the years

1. 1981 and 1982 and special contribution assessments for the quarters 2/79 and3/82 raised on applicants. 10 A Panayiotou, for the Applicants Υ Lazarou,Counsel of theRepublic B,for theRespondents Cur. adv vult. 15 20 STYL1ANIDES,J.readthefollowing judgment By meansof thisrecourse theapplicantschallengethevalidity of the decision of theRespondent No I (the"Respondent")on their objection to the incometax assessments 1979,1981 and 1982 and special contribution assessments for thequarters 2/79 and 3/
2. The salient facts of this case are as follows - 25 The applicants - CD Hay Properties Ltd - a private company of limited liability, was incorporated on 18th January, 1973 The shares thereof were held by C D Hay & Son Ltd (49.999 shares) andDOMS Holdings Ltd.(oneshare). The applicants submitted audited accounts and tax 30 computationsthrough theirauditors for the year 1979 to 1982, both inclusive 35 In May, 1984, the Respondent examined the said accounts andcomputationsand, subject tominoradjustments, hedecided to accept them. On 29th May, 1984, he informed applicants accordingly andissued assessments for thesame years. In June, 1984, theRespondent reconsidered thetransactions in land by the applicants.The profit realized from thesale, due 40 tofinancial difficulties, on 1st September, 1981,at£180,000 -, of four building sites in Limassol purchased in 1973 andgarageand shops built thereon at a total cost of £120,000.-, was treated as 395 Stylianides, J. CD.HayProp.Ltdv.Republic&An.

(1989)a capitalgainandnot liabletoincometax. Thegainfrom thesales of:(

1. a)a building site.Registration No.2938,at Kato Paphos, 5 purchased in 1973 at £1,800.- and sold in 1979 at £5,500.-;and (
2. b)ashop,Registration No.3791,KatoPaphos,purchased on30thAugust, 1978,at£8,800.-,registeredinthename 10 of the applicants in 1981,andsold on 18th September, 1982,at£21,000.was liable to income tax and special contribution, as the transactionswereinthenatureoftrade. 15 TheRespondent thereupon revisedthecomputation of29th May, 1984,by addingthereon aprofit of£3,610.-in 1979and £12,200.-in 1982. Similaradjustments weremadeinthespecial contribution computations. These were communicated to the 20 applicants, as well as to their auditors, by letter dated 16th January, 1985,andtheconsequential revisedassessmentswere senton23rdJanuary,1985. Theapplicantsthroughtheirauditorson 14thFebruary, 1985, 25 objectedthereto,claimingthatthetransactionsinquestionwere notinthenatureoftradeand,therefore,nottaxableforincome taxorspecialcontribution purposes,asthedisposalsinquestion tookplacemerelyasmeansoffinancingtheacquisitionofother moreappropriatefixed assets. 30 TheRespondent,undersection20

(5)oftheAssessmentand Collection ofTaxes Laws 1978-1979,determined the objection bymaintaininghispreviousdecisionthattheprofitfromthesale of the site and the shop, both at Kato Paphos, was liable to 35 income tax and special contribution. On 8th April, 1985,by letter,hecommunicatedthisdecisionandthereasonsthereofto the applicants; final notices of tax payable of even date were issuedandsenttothetaxpayer. 40 Hencethisrecourse. 396 3 C.L.R. CD.HayProp.Ltd v.Republic&An. Stylianides, J. Theissuethatfallsfor determination iswhetherinthepresent case the two transactions were rightly treated in the nature of trade within themeaningofsub-section (l)(a)ofsection 5ofthe IncomeTax Laws 1961-1981,whichreads:5 "5. -

(1)Tax shall,subject to the provisions of this Law, be payable at the rate or rates specified hereafter for each year of assessment upon the income of any person accruing in,derived from, or received intheRepublic in respect of10 (a) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business,profession or vocation may have been carried on or exercised;" 15 The word "trade" shall include every manufacture or adventure orconcern inthenature of trade -(section 5

(2)(f)). Whether ornot inaparticularcasetrade hasbeen carriedon 20 is a question of mixed law and fact; this question has to be resolved on each occasion bythe application of the Lawto the facts and circumstances of each particular case. (See, Savvas M. Agrotis, Ltd., v.TheCommissioner of Income Taxand Limassol Land Investments Ltd. v. The Commissioner of 25 Income Tax,22C.L.R.27,atp.30; Yiannakis S. Droussiotis v. Republic (Minister of Finance and Another)

(1967)3 C.L.R. 15; Philippou v.Republic (19S3) 3C.L.R. 1836; Rallis Makrides v.Republic (Minister of Finance)

(1967)3C.L.R. 147; HadjiEraclis andAnother v.Republic

(1984)3C.L.R. 30 604; Apostolus Ignatiou and Another v. The Republic of Cyprus, through TheCommissioner of Income Tax

(1989)3 C.L.R. 346). 35 40 In Halsbury's Laws of England, 4th Edition, Volume 23,p. 142,paragraph 212,weread:"In disputedcasestheappropriatecommissioners,on appeal to them, decide whether there is a trade, but the question what are the characteristics of an adventure in the natureof trade is a question of law. If the commissioners direct themselvesrightlyon thelaw,their decision on the evidence before them whetherthereisor isnot atrade isan inference 397 Stylianides, J. CD. Hay Prop. Ltd v.Republic &An.

(1989)of fact withwhichanappellatecourt willnot interfere,butif itappearstothecourtthatthedecisioncouldnotreasonably havebeen reached iftherehadbeen proper direction inlaw, thecourt may proceed on the footing that there hasbeena misconception oflaw." 5 In Edwards (Inspector of Taxes) v. Bairstow and Another [1955]3AllE.R.48,Viscount Simondssaidat p.54:"To say that a transaction is,or is not,an adventure in the 10 nature of trade is to say that it has, or has not, the characteristics whichdistinguishsuchanadventure. Butitis a question of law.not of fact,whatarethosecharacteristics, or in order words, what the statutory language means. It follows that the inference can only be regarded as an 15 inference offact ifitisassumedthatthetribunalwhichmakes it isrightlydirected in lawwhat the characteristics are and that,Ithink,istheassumption that ismade. It isaquestion oflawwhatismurder;ajuryfindingasafactthatmurderhas been committed hasbeen directedonthelawandactsunder 20 that direction." TheCourtdoesnot interfere withsubjudicedecisionsofthe Respondent if it is of the opinion that such decisions were reasonably andproperlyopentohimonthebasisofthecorrect 25 facts and in the light of the correct application of the relevant legislation and principles of law. (See, Georghiades v. Republic (19S2) 3C.L.R. 659; Mangliv.Republic

(1983)3 C.L.R. 52; and HadjiEraclis and Another v. Republic (supra).) 30 Theburdenliesontheapplicantstosatisfy theCourtthatthe sub judice decision was faulty or it could not be reasonably taken. 35 The test is whether the transaction exhibits features which giveitthecharacterofabusinessdeal. In California CopperSyndicate(Limited and Reduced) v.Harris(Surveyor ofTaxes),5T.C. 159,LordJusticeClerk 40 saidatpp.165-166:398 3 C.L.R. 5 10 15 20 25 CD.Hay Prop. Ltd v. Republic &An. Stylianides, J. '"It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhancedpriceisnotprofit inthesense of Schedule Dofthe IncomeTax Act of 1842 assessable to IncomeTax. But itis equally well established that enhancedvalues obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act donein what is truly the carrying on, or carrying out,of a business. The simplest case is that of a person or association of persons buying andselling lands or securities speculatively, in order to make gain, dealing in such investments as abusiness, andthereby seeking to make profits. There are many companies which in their very inception are formed for such apurpose, andinthesecases it is notdoubtful that,where they make again by a realisation, thegain they make is liable tobe assessed for Income Tax. What is the line which separates the two classes of cases may be difficult to define, andeach case must be considered according to its facts; thequestion to be determinedbeingIs thesum of gain that has been made a mereenhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profitmaking?" In the present case the applicants contend that they purchasedin 1973 thebuilding siteatPaphoswith intenttoerect 30 premises to house thebusiness of thecompany andthe business of the sister companies with which there is close association. That due to financial difficulties and the bitter experienced of their Limassol enterprise, they did not build; it is however significant that no drawings or plans were prepared and they 35 endeavoured to explain this by saying that they required more extensive adjacent land for their purposes, which they did not manage to acquire. The building site was sold to meet the purchaseprice of theshoppurchased.With regard totheshopit was purchased on 10th July, 1978 at £8,800.-. Hotel Tours 40 Limited,asister companyinthe tourist business andthehireof Ζ cars, used it. New shops were built in Kato Paphos close to the hotels.Thisshopwas sold in September, 1982,at £21,000.-, 399 Stylianides, J. C D .Hay Prop. Ltd v. Republic &An.

(1989)in orderto purchaseanew shopintheareaof thehotels. The object ofbothpurchasesandsaleswasnottradeorprofit butthe needsof thesister companiesand thefinance of theacquisition of newpremises. 5 The reasoning of the sub judice decision was given by the Respondent inhisletterof 8thApril, 1985,asfollows:"

1. Thecompany'smainscopeandbusiness interaliaisthat of purchaseandsaleofimmovables. (Memorandumand 10 Articles of Association, paragraph3).
2. Thecompanycannotbuy andsell immovables withthe reasoning that they were not suitable for theirpurpose andhadtosellthem. 15
3. Theperiodbetween purchaseandsaleisshort.
4. Because of the great speculation in land thecompany found a quick and easy way of making a profit, thus 20 constitutingtradingin land.
5. Thereis amotive of profitmaking.
6. Purchasesweremadeby instalments. 25
7. Thepurchasesweremadeingreatly speculative areas at Paphos." It is uncontestedfact thattheobject of thecompany as set 30 out intheMemorandum of Association (seeExhibit 1) is> "
8. (a) Νααποκτά διά δωρεάς,αγοράς,ανταλλαγήςή άλ­ λωςπωςακίνητονπεριουσίανοιασδήποτε φύσεως και διατηρήή πωλή,ενοικιάζη,ενυποθηκεύηή πα- 35 ντοιοτρόπως συναλλάττηται μετά της τοιαύτης ακινήτουπεριουσίας." ("3.(a)To acquire by gift, purchase,exchange or otherwise immovable property of anynatureandkeep orsell, 40 let,mortgage ordealwith suchimmovableproperty ineveryway.") 400 3C.L.R. CD. Hay Prop. Ltdv.Republic & An. Stylianides,J. InCayzer, Irvine &Co. Ltd. v.Commissioners ofInland Revenue, 24T.C.491,at p.496 it wassaid:5 "Again,thereisthecasewhereacompany isformed to trade in land and is found to be dealing with its land much as this Company hasbeen found to be dealingwithitsland. Insuch a case Ithink it might be comparatively easy to hold that it wasdealingwiththelandasatrader, sincethecompanyitself wasformed for that very purpose." 10 There is no single test of general applicability for the determination of the question whether an activity constitutes trade. Thefollowinghoweverarerelevant: Thecharacterofthe land purchased, the state of development and future potential, 15 the manner of the finance of the transaction, the business knowledge of the taxpayer, the length of the ownership, the frequency ofthetransaction orothertransactions,theobjectsof a company as contained in its Memorandum and Articles of Association. The intention to trade may be gathered from a 20 great variety of facts andcircumstances. Having given due consideration to what was contended by the applicants, the reasons given by the Respondent, and all relevant facts and circumstances, Ihave reached the conclusion 25 that the sub judice decision was reasonably open to the Respondent and the applicants failed to discharge the burden cast on them. The recourse fails. It ishereby dismissed. 30 Let there beno order asatcosts. Recourse dismissed. No orderas tocosts. 401