(1989)1939May 31 [A LOIZOU.P.] INTHE MATTER OF ARTICLE 146OF THE CONSTITUTION PANAYIOTIS THRASIVOULOU LTD. Applicants, ν THE REPUBLIC OF CYPRUS,THROUGH THE DIRECTOR OF INLAND REVENUE DEPARTMENT, Respondents, (disc No. 293/87) Taxation — Income Tax — Imance ot Directors by company through obtaining of a Dankloan— Whetherinterest corresponding to amount of Directors' borrowing pa\able to the Bank can be deducted as an expense — Question determinedin (henegative — The Income Tax Laws, sections 11(!)and13(e). 5 Taxation — income Ta\— Capihiiallowances — Purchase ot privatecars by company (a station wagon and an estate type ol car) — Notwithstanding thaithe vehiclesinthepresent casemayhavebeen used tor the carnage ol good*,they could not be classifiedas plant and 10 machinery in thesense ot theLaw, because the test ot determiningtheir characteris their classilication underthe Road TrailicRegulations and not the usemade ot them by the owner — In accordancewith the said TrafficRegulationsthesaidvehiclesarcclassifiedasprivate vehicles— It follows thatthedecision not toallowcapitalallowancemrespect of them 15 wascorrect in Law. The factual and legal issuesraisedand determinedby the Court inthis case appear sufficiently inthehereinabove Headnotes 20 Recourse dismissed No order as to costs. 638 3C.L.R. Pan.Thrasivoulou Ltd v. Republic Cases referredto: KonarisandAnother v.Republic(I9SS) 3C.L.R. 957, 5 Union ColdStorageCo.Ltd. v. Jones(InspectorofTaxes)ST:ix Cases 725, Melik MclikinnandCo.Ltd. v.Republic(I9S5) 3 C.L.R. 1322, 10 Stilvi GeneralCleaners Ltd. v.Minister of Finance andAnother (19SS) 3 C.L.R.
- Recourse. 15 Recourse against the income tax assessment for the years 1980-1984 and against the special contribution assessments for thequarters2/80,4/80,1/81-4/81,1/82,3/82,4/82, 3/83,3/84and 4/84 raised on applicant. T.Pnpadopoulos, for the Applicant. 20 Y. Lazarou. Counsel of the Republic B,for the Respondent. Cur. adv.vult. 25 A. LOIZOU. P.read the following judgment. By the present recourse the applicant Company challenges the validity of the income tax assessments for the years of assessment 1980-1984 and also against the special contribution assessments for the quarters 2/80.4/80, 1/81-4/81, 1/
- 3/82,4/82, 3/83, 3/84,4/
- 30 which were raised and determined as shown in the Schedules. attached to the opposition and marked as Appendix "A", and Appendix "B".Theapplicant Company isaprivate Companyof limited liability incorporated on the 20th April 197S. The authorised sharecapital ofthe applicant Company at allmaterial 35 times was ten thousand shares of one pound each and its issued capital was ten thousand shares of fifty cent each. Panayiotis Thrasyvoulou and his wife Eleni P.Thrasyvoulou were also the directors of the Company and the wife also the secretary of the applicant Company,whichderiveditsincome duringthematerial 40 time from trading indairy productsand provisions ingeneral. The applicant Company submitted income tax returns and 639 A.Loizou,P. Pan.Thrasivoulou Ltdv.Republic
(1989)audited accountsthrough itsauditors MessrsMetaxas.Loizides, Syrimis,Christofides andCo.,for the years of assessment 19801983 on the 23rd November 1984, and for the year of assessment 1984 on the 28th February 1986.The accounts and other information were examined by the respondent and were 5 discussedwiththeapplicant Company'sauditorsatameetingon the 19thApril 1986(before raisingassessments andbefore filing objection) atthe IncomeTaxOffice, Lamaca.Present were Mr. Costas Christofides of the (said auditor and Mr. Kyriakos Neocleous, Senior Assessor of the IncomeTax office. 10 Attheabovemeeting anagreement wasreachedbetween the applicant Company's auditors and the respondent on the issues of disallowing interest paid by the Company and disallowing capital allowances on motor vehicle Reg. No. DT675. No agreement, however was reached regarding the disallowance of capital allowances on motor vehicle Reg. No. LE450. Assessments to income tax and special contribution were then raised by the respondent on the dates indicated in Appendices "A" and "B".The income tax assessments for the years 19801984areoriginal assessmentsandsoarethespecial contribution assessments for all the quarters in question.The basis on which therespondent raisedtheaforesaid assessmentsisindicatedinhis letter dated the 25th April 1986.a copy of which is attached to the Application, as Exhibit2. Theapplicant Company objectedthrough itsauditors against the above assessments by theirletter dated the 27th May 1986. The grounds for the objection (Appendix "C" to the opposition), are briefly the following:- 15 20 25 30 "(
- i)that they disagreed with the disallowance of capital allowances on motor vehicles Reg.Nos. LE450 and DT 675. 35 (ii)that they disagreed withthe disallowance of interest paid on its directors'debitbalancesoncurrentbank accounts". The respondent maintained hisoriginal decision, determined the objections accordingly and informed the applicant 40 Company of his duly reasoned decision by letter dated the22nd January 1987(Exhibit 1)andbyfinal Noticesof Assessment for 640 3C.L.R. Pan.Thrasivoulou Ltdv.Republic A.Loizou,P. Income Tax and Special Contribution dated the 30th January 1987, whichwerealsoattachedtotheApplication. Ifind ituseful tosetoutverbatim thecontents ofparagraph 5 11 of the opposition which contains the approach of the respondent: 10 15 "The points at issue in the present recourse and the grounds on which the Respondent, based his decision in respect ofeachofthesepointsareasfollows: (
- i)Disallowance of interest on Directors debitbalances oncurrentaccounts:Overtheyears 1980 to 1984thefollowing amountswere charged to the company's profit and loss account representingbank interest andbankcharges: 20 1980£1,949 1981£2.120 1982£2,755 1983£2.830 25 1984 £2,605 Inthesameyearsthecompanyfinanced its directorswith theamountsshown incolumn
(1)herebelow whereasthe amounts dueby the company to various banks were as shown incolumn
(2)herebelow: 30 35 01.01.1980 31.12.1980 31.12.1981 31.12.1982 31.12.1983 31.12.1984 (0 Amounts due to Directors £ 16,658 22,363 22,874 16.344 27,410 27,831
(2)Amountsdue toBanks £ 20,279 27,365 29.882 30.631 31,964 32,638 Itshouldbe notedthatthe companywas incorporatedin 1978 andattheendofthatyeari.eat31.12.1978,theamounts dueto 40 thevariousbanksamountedto£15,035whereastheamountsdue tothecompanyfrom itsdirectorsamountedto£16,165.As can be seen the company since its incorporation utilized the bank 641 A.Loizou.P. Pan.Thrasivoulou Ltd v.Republic
(1989)loans not for business purposes but for financing loans to its directors. The respondent having regard to the provisions of section 11
(1)of the Income Tax Laws which provides for deduction of expenses wholly and exclusively incurred for the production of income andthe provisions of section 13(e)of the 5 same laws which specifically prohibits deduction for any disbursements or expenses not being money wholly and exclusively laid out or expended for the purposes of exclusively laid out or expended for the purposes of acquiring the income disallowed that part of the interest paid by the company to the 10 extent to whichthecorresponding borrowed funds were applied in financing loans to the company's directors. The amount disallowed in each year was estimated on the basisoftheaverageoftheamountsoutstandingatthebeginning 15 andend of the year at 9%per annum and isas follows: 1980 1,756 19812,120 19521,932 19531,969 19542,486 20 (
- ii)Capital allowances on a station wagon and estate type motor vehicles. The respondent havinginview the provisions of section 2(
- a)of the Income Tax (Amendment) Law 1979 (Law No. 8 of 1979) disallowed capital allowances claimed in respect of motor vehicles Reg. No. DT 675, station wagon, and LE450, Estate,as follows: fear Wear &Tear Allowances, Investment Allowances 19S0 19S1 1982 I9S3 1984 £1,390 1.390 1,390 1,230 1,230 £1,845 25 30 35 40 £6,630 £1,845 642 3C.L.R. 5 Pan.Thrasivoulou Ltd v.Republic A.Loizou, P. The said vehicles purchased in 1978 and 1980 respectively areprivatemotorvehicleswithinthemeaningofsub-para(
- v)ofpara
(7)ofReg. 17oftheMotorVehiclesandRoad Traffic Regulations 1973 to 1978,(as replaced in 1984 by Reg. 18 para 7(iv) of the Motor Vehicles and Road Traffic Regulations of 1984 and as such no capital allowances are allowed." Asregardstheinterest paidon amounts duetovariousbanks 10 in order.as it isevident, to finance the personal drawings of its directors ratherthan for thepurpose of producingtheincome,I consider that it was correctly submitted on behalf of the respondent that such was rightly disallowed, as such amounts were not expended for thepurpose of thetrade of the applicant 15 Company. In the case of Konaris and Another v. The Republic
(1988)3 C.L.R. 957, where interest charged on the loan of the applicants for the purpose of financing the construction of their wives' property, after considering the provisions of sections 11
(1)and 13(e) of the Income Tax Laws 20 1961-1963,1held the view that: 25 "The provisions of the law are clear and since in this instance the loan in question was not employed in the production of the taxpayers' - applicants' income, equally any interest payable on such loan cannot be considered as deductible." Support for this argument may also be found in the English case of Union Cold Storage Co. Ltd. v.Jones (Inspector of 30 Taxes) 8Tax Cases 725,where the Court of appeal held at p. • 738 that: 35 40 "Deductions maybeallowedinrespect ofmoney wholly and exlusively laidout or expended for the purposes of the trade, manufacture orconcern ofthesubject makingthe return for Income Tax purposes. It is plainly seen by reading those words that it is not all money that is laid out by the subject but only money whichislaidout.first ofall.for the purposes ofthetrade,and,secondly,laidoutwhollyandexclusively for thepurposesofthetrade,andunlesstheexpenseincurredcan be brought within these words which are narrow words the deductions cannot be allowed. It is quite plain the intention 643 A.Loizou, P. Pan.Thrasivoulou Ltd v.Republic
(1989)of the Legislature wasnot to make abroad general rule that whatever a subject likes to expend in his business could be deductedbut only suchsumsweretobeallowed to whichthe character could be assigned that they had been wholly and exclusivelylaidoutforthepurposesofthesubject's business. 5 Secondly, as regards the allowances on a station wagon and estate type motor vehicles as such are considered as private within the meaning oftheLaw,(seeRegulation 17ofthe Motor Vehicles andRoadTraffic Regulationsl973-1978), thefact that 10 the vehicles in the present case may have been used for the carriage of goods doesnot render them plant andmachinery in the sense of the Law.Thisview wasalsoheld inthe decision of the Full Bench of thisCourt inthecaseof Melik Melikian and Co. Ltd. v.The Republic (\%5) 3C.L.R. 1322.Seealso Stilvi 15 General Cleaners Ltd. v. Minister of Finance and Another
(1988)3 C.L.R. 51. As held the test for determination of the character of the vehicle is its classification under the Road Traffic Regulationsandnottheusemadeofitbyitsowner.Such classification is solely dependent on the provisions of the 20 relevant Regulations leaving thus no discretion to the Commissioner to adopt any other test. For all the above reasons I find that the sub judice decision was reasonably open to the respondent and therefore this 25 recourse fails and ishereby dismissed. Noorder astocosts. - - Recoursedismissed. No orderas ro costs. 644