clr/1989/1989_3A_849.pdf

(1989)at all as office accommodation, that in subsequent years similar transactions were entered into by applicants, that the property was situated in a rapidly developing tourist area of Limassol. In the light of the aforesaid facts the Court held that the sub judice decision was reasonably open to the respondent. 5 Recourse dismissed. .\'o order as to costs. 10 Casesreferred to: Ceorghiadcs v. Republic (19S2) 3 C.L.R.

1. Philippou v.Republic (I9S3) 3 C.L.R. I3S
2. 15 Hadjil-raclisand Another v. Republic (Commissioner of Income Tax) (19S4) 3 C.L.R 6M. Amani hnteiphses v.Republic (19S5) 3 C.L.R I9S. 20 Turner v. Last f1965142 T.C.
3. Clark v. Folleit[197314$ T.C.
4. J. liolson Λ Son Ltd. v. Farrclly(I953J34 T.C.
5. 25 Pickford v. Quirkc f1927113 T.C
6. Rcllim Ltd. v. Vise11951]32 T.C.
7. 30 Granville Building Co. Ltd. v. Oxby (H.M. Inspector of Tuxes) 35 T.C.
8. Recourse. 35 Recourse against theincometax assesment for 1979and the special contribution assessment for the last quarter of 1979 raised onapplicants. - N.Papaefstnthiou, for the Applicants. 850 40 3 C.L.R. Spiliotis and Klappis Ltd v. Republic Y.Lnzarou.CounseloftheRepublicB.fortheRespondents. SAVVIDES, J. read the following judgment. Applicant by the present recourse challenges the income tax assessment for 5 the year of assessment 1979 (year ot income 1979) and the special contribution assessment for the quarter ending 31st December, 1979 which were raised and determined by the respondent Director of InlandRevenue. 10 Applicant is a private company of limited liability incorporated in Cyprus on the 23rd February.
9. The authorized share capital of applicant company at all material times was 50.000 shares of £1 each and its issued and paid up share capital was 32.000shares of £1 each held equally by Mr. 15 Aristos Spiliotis and Demetris Klappis of Limassol who are also its directors. Applicant company derived its income at all material times from a business of carpentry and furniture manufacturing. 20 The main issue raised by this recourse isthe assessment to income tax and special contribution of the profit of £11,000.realized from the sale of a flat which was acquired in 1978 for £11.000.-andsold on 20th November. 1979tor £23,000.- after deduction of £1.000.- paid by way of commission. 25 The said flat, part of Omelka Court of Limassol was acquired in 197S from the developers in consideration of carpentry work. The cost of acquisition was made by performance of carpentry work executed in 1978 for the 30 benefit of the developers amounting to £5,500 during the year 1978and the balance in 1979duringthetime when the building inwhichthepurchasedflatwassituatedwasunder construction. On the 30th June, 1979, respondent raised a temporary 35 assessment based on applicant's temporary return showing Temporary income for 1979£3,000.- on which the temporary tax assessedamountedto£750.-. Asapplicant failedtosubmitintimeitsreturn andaccounts for 40 theyear 1979respondent issuedtoapplicant on23rdMay, 1981 a notice of assessment for the year of assessment 1979 of an estimated income of £10,000.- against which an objection was 851 Savvidcs, J. Spiliotis and Klappis Ltd v. Republic

(1989)made on the 11th June. 19S1by applicant's auditors. Applicant submitted its return of income and auditedaccounts for the year 1979on 7th April. 19S2. When theaccounts wereexaminedby an assessor it was found by him that the applicant company realized a profit of £11.000.- from the sale of one flat pan of 5 Omelka Building which was not shown in its profit and loss account but instead it was transferred directly to its general reserve. On 12th November, 1985. the respondent Director of the 10 Department of Inland Revenue addressed to applicant a letter by which the applicant was informed about the revision of the computation submitted by it. The contents of such letter read as follows: 15 l, I wish to refer to the accounts for the years 1978and 1979 which were submitted by your auditors Messrs. Metaxas. Loizides, Syrimis & Co. and to inform you that the computation of your income for the year 1978 has been accepted, but the computation for the year 1979 has been 20 revisedasfollows: Income per computation submitted Add:Special Contribution Interest paid disallowed Profit from sale of flat £7,236 436 1,000 11,000 25 £19,672 Less:Revised amount of Special Contribution 3,386 Adjusted income for the year Less:Loss brought forward £16.286 7,366 Chargeable income £8,920 On 16th November, 1985,respondent issued to applicant a notice of assessment (Appendix Dto the Opposition) showing as net income the amount of £8,920 as appearing in the 40 aforesaid letter of the 12thNovember, 1985. 852 30 35 3 C.L.R. Spiliotis and Klappis Ltd v.Republic Savvides, J. As a result applicant filed the present recourse challenging the income tax assessment for the year 1979 and also the special contribution assessment which followed such assessment. 5 On the5th February, 1986(after the date of the filing of the present recourse, but before respondent came to know about

1. it)respondent issuedto applicant company a revised notice of assessment for special contribution for the year 1979. which 10 however, was later withdrawn. Also an objection raised by counsel for respondent in his opposition that the recourse against special contribution waspremature was at alater stage abandoned by counsel for respondent. 15 20 25 The legal grounds on which the recourse is based are as set out inthe application the following: 1. The "profit" from the disposition or sale of one flat of the applicant is not profit or benefit within the meaning of s. 5(l)(
2. a)or 5(t)(
3. h)of the Income Tax Laws and the respondent arbitrarily and acting under a misconception treated it itssuch. 2. The respondent wrongly interpreted and applied the Income Tax Laws and the Assessment and Collection of Taxes Lawsasfar asthey concern the nature,character and circumstances of the realization of a profit from the disposition of a flat and the taxable condition of the applicant. 30 3. The respondent failed totake intoconsideration undisputed and material factors but on the contrary he relied and/or took into consideration factors irrelevant and/or which could not betaken into consideration. 35 4. The respondent acted under a misconception of fact and/or failed to carry out a proper inquiry on substantial facts concerning the taxable state of applicant and/or matters related to the sale oftheflat. 40 5. The sub judice decision is arbitrary and was taken in abuse and/or excess of power. 853 Sawidcs, J. Spiliotis and Klappis Ltd v. Republic

(1989)6. The sub judice decision lacks due or legal reasoning and 7. The applicant has been treated in a discriminatory and unequal wav. 5 It is the contention of counsel tor applicant in his written address that the flat in question was acquired by the applicant to meet its need to set up office accommodation for the company and for this purpose when it undertook the carpentry worksat Omelka Court itagreedtobuythe flat inquestion and 10 the purchase price was agreed to be set off against the valueof the said carpentry work. Ithas been contented by counsel for applicant that such bargain was a perfectly legitimate one and could not in anv wav be considered as a trading activitv. 15 Thecompany's main object,headded,wasthecarpentry and furniture business and theacquisition of theflatwasa necessary prerequisite for the proper organization, management and the accommodation of the olfice requirements of the then newlyestablished company. The sale of the Hat in question, counsel 20 submitted wasnecessitated (a)because itwasnomore neededas an oftice accommodation and (

1. b)in order to liquidate an asset so that the necessary tunuScould be found for theexpansion of the workshop and the establishment of a unit comprising both the workshop and the oftice which had been in process since 25 July. 1979. Counsel expounded lurther on hisgrounds of law set out in the recourse and on the basis of cases decided by the Supreme Court he submitted that the transaction in question was not a 30 trading one in the circumstances and that the decision challenged is vitiated by wrong application ot the established principles of administrative andtax lawandshouldbe annulled. Counsel for the respondent on theother handbyhiswritten 35 address submitted that the judice decision concerning the assessment of the income tax was reasonably open to the respondent andsetout factors whichsupport theconclusionsof the respondent. The factors to which counsel made reference were the following: (
2. a)The property in question washeld bythe applicant tor a S54 40 3 C.L.R. Spiliotis and Klappis Ltd v. Republic Savvides. J. relevantly short period of time (it was acquired in 1978 and sold in 1979). (
3. b)The transaction under consideration was not the only suchtransaction engaged inbytheapplicant. In 1980the applicant acquired ashop under the same circumstances which was sold in 19S5 realizing a profit of £10,000.-. Alsoin 1986theapplicant soldmore property consisting of land andbuildingsthelandhavingbeen acquired since 197Sand the buildings erected in subsequent years. (
4. c)The said property was situated near the sea at Amathus which wasand isarapidly developing tourist area where properties suchasthesaidproperty wereandareingreat demand. Insupport ofthishemadereference tothecase of Georshiacies v.The Republic (19S2) 3 C.L.R. 659, 670. (
5. d)The applicant never set up office in the premises under consideration; in fact the flat was never registered in its name but as it appears the applicant had assigned its rights to the new purchasers in whose name the transfer was effected. This fact, counsel submitted, is a clear indication that the applicant acquired the property with thesoleobject ofturningitoveragain ataprofit andthat at no time did it have any intention of using such property. This view,counsel added, isfurther reinforced by the fact that the property's location rendered it unsuitable asan office asitwassome distance away form theapplicant's workshopwhich wasintheOmonia area and also from the business community in the town and its related facilities for example banking services. suppliers etc. (
6. e)Finally, counsel submitted that it iscommon knowledge that most businesses in thebuildingtrade connected with buildingdevelopersinordertobegiven aspecial contract agree to receive flats, offices or shops from such developers as part consideration against the value of the work to be carried out by them as sub-contractors and subsequently sell same to recover the cost plus profit for the work represented in the property. This, counsel 855 Savvides. J. Spiliotis and Klappis Ltd v. Republic

(1989)submitted, asisevident from similardealingsentered into bytheapplicant aswellasfrom therelativelyshort period that the properties remain in its possession was part of the ancillary trading activities of the applicant company undertaken for the purpose of promoting itstrade. 5 Counsel for applicant rejected the contention of counsel for respondent that it is a very well sound commercial activity followed by all businesses dealing with building developers to acquire flats or shops in consideration of providing materials 10 and work and submitted that such contention is nothing more than a guesswork leaving aside and entirely ignoring the particular circumstances of thecase. Furthermore by his written address in reply counsel for 15 applicant maintained that thesubjudice decision isvitiatedwith illegality and violates the established principles of Administrative Law in that: (

1. a)There exists at least probability that the respondent 20 acted under a misconception both of the law applicable and the facts relevant to the case: (
2. b)the respondent failed to carry out a due inquiry; and 25 (
3. c)the sub judice decision is based on an erroneous reasoning or lacks due reasoning. The issue that calls for determination in the present case is whether it was reasonably open to the respondent to treat the 30 profits which the applicant realized form the sale of the flat in question as trading profits and as such taxable under the provisions of the relevant income tax legislation. The question of taxability of profits arising from the sale of 35 land has been judicially considered by the Supreme Court in a number of cases (vide Georghiades v. TheRepublic (\9S2)3 C.L.R. 659;Philippou v. The Republic

(1983)3C.L.R. 1386; HadjiEraclis andAnother v. TheCommissioner of income Tax (19S4) 3C.L.R 604;Amani Enterprises v.TheRepublic 40

(1985)3C.L.R 19S). The principles emanating from such cases are that the Court will not interfere with the findings of the S56 3 C.L.R. Spiliotis and Klappis Ltd v. Republic Savvides, J. Director of the Department of Inland Revenue ifsuch findings were reasonably open tohim on theevidence before him. In Philippou v. The Republic (supra) Triantafyllides, P. 5 (the then President of the Supreme Court) makes a very lucid exposition of the law on the matter with reference to the relevant case law both in England and of our Supreme Court. At p. 1390we read the following: 10 15 "Whether ornot inaparticularcasetradehasbeencarriedon is a question of mixed law and fact and there does not exist in this respect a conclusive test of general applicability: and such question has to be resolved on each occasion by the application of the lawto the facts and circumstances of each particularcase(see,interalia,inthisrespect.Agrotis Ltd. v. The Commissioner of Income Tax. 22 C.L.R. 27, 30, Droussiotis v. The Republic

(1967)3 C.L.R. 15.23, and Vassos Estates Ltd. v. The Republic

(1969)3 C.L.R. 58, 71,72)." 20 Therefore, what has to be examined in the present case is whether there was evidence entitling the respondent to reach theconclusion thattheprofits underconsideration were trading receipts and in doing so I shall consider the various factors 25 relied upon by the respondent in reaching his sub judice decision. Such factors, are: (

1. a)Duration of ownership; (
2. b)Frequency of similar transactions; (
3. c)Situation of the property; (
4. d)The applicant 30 never set up office in the premises in question; (e)The alleged business practice that most businesses in the building trade in order to be given a sub-contract agree to receive flats etc. as pan consideration against the value of the work to be done by them assub-contractors andsubsequently sellsame to recover 35 the cost plus profit. I shall deal with the above factors in the order they were presented. 40 (
5. a)Duration of ownership: The relevance of the duration of a short period of ownership as an indication of trading finds support inanumberof Englishcases. 857 Savvides, J. Spiliotis and Klappis Ltd v. Republic

(1989)Thus in Turner v.Last [1965]42T.C.517at pp.522-523we read the following in thejudgment of Cross.J.: "A man may buysomething, whether it be land or a chattel. forhisown useandenjoyment withnoideaot aquick resale. 5 andthen,quite unexpectedly, hemayreceive an offer tobuy which istoo tempting to refuse. That isa perfectly possible state of facts; but the fact that there was a quick resale naturally leads one to scrutinise the evidence that it was not envisaged from the first very carefully." 10 In that case, the profit arising from a transaction in land. .where the period between completion of purchase and contract of sale was less than four months, was held to be taxable. (Relevant isalsothecaseol Clark v. Fo//eff [1973]48T.C.677). 15 In the present case the property was acquired by the respondent in 1978to beusedasan oilicetorm which to am its business, and was sold the lollowing year without the respondent havingever used it as an office. 20 (

1. b)Frequency of similar transactions: The transaction under consideration was not the only transaction of this nature engaged by the applicant. According to the material in the hands of the respondent the respondent company'in 1980 25 acquired a shop under similar circumstances, which it sold in 19S5realizing a profit of£10.000.-. In 1986the applicant sold more property consisting of land and buildings These transactions were expressly mentioned by counsel for the respondent, in his written address and had not been 30 contested. Frequency of similar transactions is an important factor in deciding whether or not a trade iscarried on. 35 In ./. Bolson & Son Ltd. v.Earrelly f1953]34T.C. 161it was held, at p.167, that'· none of them are really any authority for the present case, but are merely a lot of illustrations about what is not 40 and what is an activity in the nature of trade. A deal done once is probably not. though it may be. Done three or four S5S 3 C.L.R. Spiliotis and Klappis Ltd v. Republic Sawides, J. times it usually is." InPickford v.Quirke [1927] 13T.C.251at p.263weread: 5 10 "Now ofcourse itisvery well known that one transaction of buying andsellingathing does not make a man atrader, but if it isrepeated and becomes systematic, then he becomes a trader andthe profits of the transaction, not taxable so long as they remain isolated, become taxable as items in a trade as awhole ". The number of transactions of asimilar nature also played a pan in the decision of the Court of Appeal in Rellim Ltd. v. Vise [19511 32T.C.254. There acompany acquired a number 15 of houses, garages, a farm and 60 acres ot land by separate purchases in 1939 and 1944. Between 1945 and 1947 the company sold by five separate sales, two ol the houses,the 13 acres ot land and the tarm. It washeld that the profits accruing from these transactions were trading profits. 20 It has been contended by counsel for applicant that the subject-matter property wasshown in the applicant's books as a tixed asset. I agree with the submission of counsel for respondent that this fact is not per se evidence ot the 25 company's intention to hold the flat as an investment. Support inthelatter proposition ma\ be found in Granville Building Co. Ltd. v. Oxby (H.\t. Inspector of Taxes) 35 T.C. 245 where notwithstanding the fact that the property. 30 comprising of houses,wasshown in the-company's accounts as capital assets. Harman. J., came to the conclusion that the property was part ot the company's stock-in-trade. 35 (
2. c)Situation of Property: The subject property was situated near the seaat Amathus.within a rapidly developing tourist area where there is agreat demand for such properties for tourist purposes. The situation of the property is an important factor to be 40 taken into consideration in cases of this nature. As obsen'ed bv Pikis. J., in his judgment in the Full Bench case of Georghiades v. TheRepublic

(1982)3C.L.R. 659.670: S59 Savvides, J. Spiliotis and Klappis Ltd v. Republic

(1989)"The character of the land purchased its state of development and future potential as well as the income it yieldsat thetime of purchase or islikelyto yieldinfuture, is a most consequential factor." 5 (

1. d)Use of the property: It is the contention of the applicant that the flat in question was bought by the company to be used as an office from which to am its business. In fact it has never been used assuch. The factory of the applicant is situated at Omonia Quarter of Limassol and the flat in 10 question at Amathus, miles away, in a tourist area. From the material in the hands of the respondent the Hat in question, though bought by the applicant, was never registered in itsnamebuttheapplicant assigneditsrightsto thenew purchasersinwhosenamethetransfer waseffected. 15 (
2. e)The alleged business practice: Ifind it unnecessary to deal with this factor. Noevidence hasbeen adducedbefore mein support of such practice. Irrespective of the soundness of this contention, in the absence of any evidence I cannot 20 treat such factor as evidence in support of respondent's decision. Bearing in mind all the factors enumerated above, with the exception of factor (e)which I have discarded. Ihave come to 25 the conclusion that on the evidence before him, the decision taken by the respondent Director of the Department of Inland Revenue was one reasonably open to him. I reject the contentions of coun.sel for applicant that there 30 was lack of due inquiry in thiscase or that the reasoning of the sub judice decision iserroneous. In the result this recourse fails and is hereby dismissed. I make no order for costs. Recourse dismissed. No orderas to costs. 860 35