clr/1989/1989_3A_627.pdf

(1986)3C.LR. 900-907hasno bearing asregards the ambit of section 9 — Inthe absence of comparativesales, the Directorproperly relied on evaluation made in accordance with the residual or development methodof valuation — Inthecircumstances theassessment of the value of the landas at the crucial time wasreasonablyopen to the respondent. . . . B y means of this recourse the applicant, as administrator of a deceased's property, impugns the decision whereby he was assessed to pay capital gains tax in respect of asale of immovable property,part of the estate of the deceased. The dispute concern the value of the land as found by the Directorat thetime of thesale. Inthecircumstances of this case .and as the..property consisted of a..ficld .and there.wcre.no comparable sales, the Courtfound that it was proper for the Directorto 627 Loucaides v.Republic & Another

(1989)rely on a valuation madeon theresidual method ofvaluation. Having reachedtheconclusionthatinaccordancewithsection9ofLaw52/SOthe Director wasempowered toassessthemarket valueof thelandwithout beingboundbythe pricedeclaredbytheparties to the transaction,the Court dismissedthisrecourse. 5 Recourse dismissed. No order as to costs. Cosesreferredto: }Q AdisLtdv. Republic(\9S6)3C.L.R. 900, Republic v. ChnstofidesandOthers(19S4) IC.L.R. 305. 15 Trustee v.Ministryof Works[1958]3W.L.R.536, CommissionerofLimassol v. Kirzi(1959-1960)24 C.L.R. 197, MotiandAnother v. Republic(I96S) I C.L.R. 102. 20 Republic v. Mantovani

(1975)IC.L.R.

1. Recourse. 25 Recourse against the assessment of capitalgainstax onthe estate of thedeceasedAndreasLoucaides. Y. Potamitis.for theApplicant. 30 Gi Hadjipetrou, Counsel of the Republic B, for the Respondents. Cur. adv.wit. 35 SAWIDES.J.readthefollowingjudgment.Theapplicantis the administrator of the estate of the deceased Krystallia Pavlides,ofLimassol,andbythepresentrecoursehechallenges theassessmentofcapitalgainstaxontheestateofthedeceased, which was communicated to the applicant by notice of 40 assessment dated24th December
2. 628 3 C.L.R. Loucaides v. Republic &Another Savvides, J. The facts of thecase are as follows: The deceased Krystallia Pavlides, owned a field under Registration No.G 159.plot 223,at MesaYitonia. Limassol.of an extent of nine donums.three evleks and 2.400 sq. feet. By a contract of sale entered into between the applicant as administrator of the estate of the above deceased and Vasos Ayiomamitis Developers Ltd..on the 14thNovember. 1983the applicant agreedtosellandthesaidbuyer agreed tobuy thesaid field for the sum £70.000.-.The contract of sale was deposited with the District Lands Office on the following day. On the 9th December. 1983.the applicant submitted to the respondent Director of the Department of Inland Revenue (hereinafter to be referred to as "respondent 2") a declaration form for the disposition of property on which he declared that theproceeds ofthesaleamountedto£70.000.-.Healsodeclared that the value of the property on the 27th June. 1978 was £48.000.-and hededucted from thesale price asum of£2.218.as commission agent's fees and £118.- as stamp fees. On the basisofthecalculationsmadebytheapplicant,hesubmittedthat the tax payable for capital gain realized was£3.956.40 whichhe paid. On the basis of such declaration respondent 2 made his assessment as follows: Sale price Less: £70.000.00 Market valueon27.6.1978 £36.500.00 Stamps on salecontract £ 11S.(X) £36.618.00 Capital gain Capital GainsTax 33.382.00 6.676.40 The applicant accepted the above assessment and paid the difference on thetax payable. Theproperty wastransferred inthenameofthepurchaseron 629 S a \ u d e s . J. Loucaides v. Republic &Another

(1989)the Sth March. 19S5 On the declaration form tor the transfer of the property, the sale price ot the property was declared as being£70.000-on the date the contract of sale wasconcluded The Department of Lands and Suneys did not accept such price as the correct market value ot the property tor transfer 5 tees purposes and assessed its value at £120,000.-.The transfer fees were paidaccordingly andthetransfer waseffected On the same day the Department ol Lands and Survevs informed respondent 2 accordingly by submitting to him the prescribed lorm containing particularsofthetransaction andotthetransfer 10 tees paid Upon receipt of the above information by respondent 2, respondent 2directed theValuations Section ot his Department to prepare avaluation ot themarket valueof theproperty ason 15 14th November 1983 Such valuation was carried out and the market value ot the pioperty was assessed as on the.14th November 19S3, as being £1120.000- The valuation report is belore~me as~arinex~*C""to"the opposition ~ ~ 20 As a result ol such valuation, respondent 2 revised his previous assessment and made a new one fixing the market value ot the property as on the 14th Novembei.

1. at £120.000-the capital gain realized at £83.382.-and the Capital Gains Tax payable at £16.67640 less £6.67640 already paid 25 thus, leavinga balance ot tax amounting to £10,000.- as outstanding and due He communicated his assessment to the applicant on the24th April. 1985 Applicant objected to the above assessment b\ letter dated 30 the 25th May. 1985 Respondent 2 rejected the objection and by his letter dated 24th December. 1986.communicated to the applicant hisfinal decision andgavehisreasonswhyhe rejected applicant's objection. Following such decision the applicant tiled the present recouise challenging thesubjudice decision 35 The legal points submitted in support of applicant's praver tor relief asstated in the application are the following - 1 The sub judice decision is contrary to Article 242 of the 40 Constitution andthe provisions of Law52/80 630 3 C.L.R., .._ Loucaides v.Republic &Another _ Savvides, J.
2. It isnot based on any authority derived from thelaw.
3. It wastaken inexcess and or abuse of powers.
4. It was not reasonably open to the Director of the Department of InlandRevenue to assess'such amount.
5. The respondent basedhisvaluation on wrongfacts anddid not take intoconsideration the real facts of thecase.
6. The respondent did not take into consideration „ _ ^ „ _ _ „ ^ , _ j . . ^ _„„_.„.__.__ t e Q t r
7. The imposition of the sub judice tax was made in excess or abuseof power.
8. The valuation of the respondent on which the sum of £120.000.-wasbased iswrong. -The arguments of counsel for applicant-as-emanating-from--his written address, his supplementary addresses and various documents filed may be briefly summarized as follows: (a) The sub judice assessment violates Article 24.3 of the Constitution inthat it imposes retrospective taxation. (b) The assessment was excessive. According to his submission based on the valuation of applicant's valuer, themarket valueofthepropertyonthedateofsalecould not bemore that 100%of itsvalueasat27th June. 1978, which asagreed by both parties was£36.
9. According to the above allegation the market value of the property is fixed at £73.236.but in his written address counsel submitted that it couldnot be more than £70.000.-. (c) The valuation method adopted by the valuer of the respondent in finding the market value of the propertywasnot the safest one in the circumstances and that the safest method wasthat of thevaluer of the applicant. (d) Forpurposes of capital gain,under the provisions of the 631 Savvides, J. Loucaides v. Republic & Another

(1989)law. such gain is the profit realized trom the disposition of theproperty.Thesubject matterpropertywas soldtor £70.000- and this is the amount realized trom the disposition of the property according to the declaration ot sale at the time ot the transfer In the present case 5 there is no dispute that the property was sold tor £70.000 - andthereisnoallegation by therespondents ot fraud orfalse entriesby theapplicant Theprovisions ot the law, counsel submitted,should be strictly interpreted and in case ot any doubtthebenefit of such doubt should 10 begiven to the taxpayer In support ot his submission in this respect hesought to rely on the dictainAdis Ltd. v. The Republic

(1986)3 CLR.900, 907 that a "Declaration ot Transfer is a formal document 15 prescribed by Law andonecannotaccept anything inconsistent with itscontents". Counsel tortherespondentsupported thesub judice decision and submitted that such decision was correctly taken underthe 20 relevant provisions of theCapital GainsTax Law, 1980,andthe Assessment and Collection of Taxes Laws 1978 and 1979 and that it does not violate Article 242 ot the Constitution He further contended that the valuation ot the valuer of the respondents is the correct one and in the circumstances the 25 proper method employed once the comparable sales method could not be utilized due to the absence ot comparable salesin the area He also submitted that the provisions of s 9

(1)ot the Capital GainsTax Law 1980areclearandunambiguous andthat tor the purposes of the assessment of the gain realized trom a 30 sale the value ot the property is its market value at the timeof its disposition as correctlv found by respondent2 In the course of the proceedings and after the exchange of written addresses counsel tor applicant abandoned his first 35 ground otlaw inthatthesubjudicedecision νlolatesArticle 24 3 ot the Constitution Therefore, Ishall not deal with thisissue From the material before me it emanates that it iscommon ground that the value of the subject-matter property on 27th 40 June. 197S. was correctly assessed at £36.500- to which asum ot £118 -had to be added in respect of stamp fees ot the sale 632 3 C.L.R. Loucaides v. Republic & Another Savvides, J. agreement. Also that there were no comparable sales of properties in the area and. therefore, the comparable sales method of valuation could not be utilized. 5 Before embarking on the correctness of the relevant valuations otthevaluersof both parties andtherespective result reached by each one of them. Ishall deal with the contention of counsel for applicant that s.9(

1. l)of the Capital Gains Tax Law was wrongly interpreted and applied by respondent 2 and that 10 the market value of the propeny is the value it was sold under the contract of saleandstated on the declaration form. The provisions of s.9 of the Capital Gains Tax Law, 1980 (Law 52 of 1980) are clear andunambiguous. They empower the 15 Director of the Department of Inland Revenue to assess the value of a property at the time of its disposition on the basis of its market value in the open market at such time and he is not boundto accept any amount declared between thesellerandthe purchaser as being the sale price of the property. If any such 20 restriction is accepted then it would have afforded the opportunity toland dealers, for thepurpose of evading taxation, to declare any amount much less than the market value of the propeny in the open market at the time of the disposition. 25 .s.9 provides as follows: 30 '"9.-(
2. l)To προϊόν τη; διαθέσεως ιδιοκτησίας είναι το πο­ σόν όπερ η τοιαύτη ιδιοκτησία,κατά την γνώμην του Δι­ ευθυντού.θααπέφερενεάνεπο)λείτοεντηελευθέρααγορά κατά τον χρόνον καθ'όνηιδιοκτησία διετέθη. 35

(2)Εάνδεν έ/η λάβειχο')ραν αγοράήπίόλησις,θα λογίζηται ως πληρωθέν ήληφθέν,αναλόγιος της περιπτοκτεως. ποσόν ίσον προς το ποσόν όπερ ητοιαύτηιδιοκτησία, κατά την γνώμην του Διευθυντού θαοσ^ρερεν εάνηγοράζετο ήεπωλείτο. αναλόγωςτης περιπτώσεως εν τη ελευθέρα αγορά ν.αθ'ονχρόνον επεσυνέβη το γεγονός." The translation in English is as follows: 40 ("9.-(l) The proceeds from the disposal of propeny shall be the amount which, in the opinion of the Director, such 633 Savvidcs,.J. Loucaides v. Republic & Another

(1989)propeny might be expected to realize if sold in the open market at thetime ofthe disposal of such property

(2)If no purchase or sale has taken place, there shall be deemedtohavebeen paidorreceivedanamountequaltothe 5 amount which in the opinion of the Director such propeny would realize, if bought orsold, as the case may be, in open market at the time of the occurrence of the event."') Respondent 2. in the present case, very correctly, in the 10 exercise of his powers under s.9. carried out a valuation to ascena1h~lrie"marRe"f value of"the property" as "prb'vided'by subsection

(1)of s.9. The case of Adis Ltd. v. The Republic (supra) on which 15 counsel for applicant sought to rely in support of his argument cannot be of any assistance to the applicant. The dictum on whichcounsel for applicant based hisargument isin connection with the effect of Declarations of Transfer on subsequent -inconsistent allegations of the parties-making-the Dec-lararion-~20but not restricting in any waythe power of the Director of the Department of Inland Revenue, who was not a party to the Declaration, to contest the value declared as not representing the amount that such propeny would realizeitbought orsoldas the case may be in the open market. In fact in that case though 25 the amount of disposition ofthepropeny wasdeclared asbeing £10.000.-the Director ofthe Depanment of InlandRevenuedid not accept such declaration andfixed thesame at £18.000.-and consequently raised an assessment of capital gains tax and his decision was upheld by the Court. 30 Thisdisposes of the legal point raisedunder (d)hereinabove. I shall next deal with the other two legal points (

1. b)and (
2. c)together. The valuation of the applicant is.as described by his valuer. basedon theannual increaseinthemarketvalueofbuildingsites in the area between 197S and 1983. According to his calculations the annual increase in such values during the 40 material period was of an average of 15%per annum. He then treated suchaverageincreaseasapplicabletothe subject-matter 634 35 3 C.L.R. Loucaides v. Republic &Another Savvides, J, propeny whichwasafield andcametoconclusion that oncethe accepted valuation of the propeny as on 27th June, 1978was £36,500.-and the annual increase till the 14th November. 19S3 was 80.7% the value of the propeny on 14th November, 19S3 5 was£65.955.-and in consequence lower than the price realized from thesale. In a repon prepared three months later containing his observations on the valuation repon prepared on behalf of the 10 respondents, he valued the same propeny at £76,551.- out of which he deducted £6.241.- for transfer fees and interest. The fact however remains that whereas in his first valuation he assessed thevalueofthesubject-matter propeny at£65.955.- in his second valuation without any change of circumstances or 15 time,he assessedthe value of thesame property at £76.55.1.-. _ .The valuation of the respondent on the other hand is based _ ontheresidual ordevelc>pment_methodofvaluation.The reason "tor resorting to such method was"because "the"comparable"sales 20 method which isthe most appropriate inland acquisition cases andwhich leavesverynarrowmargin foranymistake,couldnot be resoned to as the subject-matter propeny was a field in an undeveloped nature and there were no comparable sales of similar propenies inthe area at the material time. 25 According to the above method the possibility of the development of the land in question into building sites was considered and the propeny was notionally convened into building sites and then by taking into consideration the 30 comparable sales of building sites and adjusting their value to the number of buildingsites to which theland in question could be divided subject to any deductions for the construction ot roads,interest onloans,commissionstotheestateagentsfor the saleof thesitesandthe profit andrisk involved,thevalue ofthe 35 subject-matter land was found to be £130.690.-. (Paniculars appear in the valuation repon, Appendix "C" to the Opposition).After deductingfrom suchamount thetransfer fees which amounted to £9.455.- a round figure of £120.000.- was considered tobethereasonable market valueof thepropeny at 40 thematerial time. . . _ - -The residual or development-method of -valuation is a well 635 Savvides, J. Loucaides v. Republic &Another

(1989)known method of valuation when thecomparable sales method is not possible. As observed in TheRepublic v. Christofides and Others

(1984)1 C.L.R. 305 -308"This method, thought it has a margin of error due to the various factors that are taken intoconsideration, itisusuallyadopted wheneverthere wereno 5 current sales of comparable properties to allow for the employment of the best method -the direct comparison of the sale price of such propenies with that of the land acquired". The residual or development method of valuation was met 10 with approval in a number of cases. In Maori Trustee v.The Ministry of Works [ 1958] 3 YV.LR. 536 at pp. 542-543 the following extract from the judgment of Gresson, J. was cited with approval: 15 "In my opinion in thiscase the land must be valued for what it in fact wason thespecified date -atract of land capableas to some, perhaps all of it. of subdivision into building allotments, and of being sold at some time and over some period in that form. That circumstance would influence a 20 purchaser in his determination of price. In estimating what price a purchaser would be willing to pay recourse may be had to an examination of the estimated gross yield from a subdivision as yet notional only, and the estimated deductions that a purchaser would have to take into 25 account;" This method was also recognized subject to certain observations as to matters which should be taken into consideration in the Commissioner of Limassol v. Marika 30 tf/rzi(l959-1960)24 C.L.R. 197.in Moti and Another v.The Republic

(1968)1 C.L.R. 102-113 and the Republic v. Mantovani

(1975)1 C.L.R. 232 at p.236. Iconsider the valuation repon of the respondents ascorrect 35 and based on one of the recognized methods of valuation whereas on the other hand the valuation of the valuer of the applicant cannot be relied upon in the present case as it is a speculative valuation basically based on the comparison of the subject-matter propeny, astripofland,withbuildingsiteswhich 40 are propenies of completely different nature and which present no similarity to the subject-matter. The annual increase of the 636 3 C.L.R. Loucaides v.Republic &Another Savvides, J. value of building sites cannot be used for finding the annual increase of the value of a strip of land. Such method might suppon an argument in respect of a valuation on the annual increase if the comparison is made between comparable 5 propenies and not in the case of comparison of two dissimilar innature propenies. On the basis of my above finding I have reached the conclusion that it was reasonably open to respondent 2 to find 10 the value of the propeny as he did and reach the sub judice decision. In the result the recourse is dismissed and the sub judice decision isaffirmed. There will be noorder for costs. 15 Recourse dismissed. No orderas locosts. 637