IONIDES ν. REPUBLIC (1989) 3A CLR 199

Taxation -Assessment and collection of taxes -Fictitious transactions -The Assessment and Collection of Taxes Laws 1978-1979, section 36(1)-Interference by Court -Principles applicable.

Constitutional Law -Taxation -Constitution, Art. 24-The Collection and Assessment of Taxes Law 1978-1979, section 36(1) -It does not in. any way offend against Art. 24.2 of the Constitution.

The applicant, is a qualified and authorised accountant-auditor During 1973 a private company limited by shares was incorporated with a share capital of 40pounds, divided, into 40 shares of £1 each, of which the applicant held 1, applicant's wife 1, applicant's daughter 1 and applicant's son 37 shares. During 1980 the company increased its capital to 100 pounds. The 60 new £1 each shares were allotted at par equally to three persons as follows, ie 20 shares to each of the in-laws of the applicant's daughter and the remaining 20 shares to one EleniChristophorou. Later in December 1980 the new shareholderstransferred by way of gift these shares to the applicant's grandchildren.

On 31st December 1980 the company decided to divide its whole income for the year 1980 as dividend to its shareholders, who, otherwise, did not have a. taxable income. It was ascertain, that the company'sincome was derived by the activities of the applicant himself. The applicant was the only person, who could render the services in question, but did not receive any salary. The whole income of the company was distributed to the shareholders.

In these circumstances the Court found that it was reasonably open for the Commissioner of Income Tax to find that the set-up of the company was fictitious, resulting in artificial diminution of the applicant's income. In the light of the above finding and of the principle enunciated in the second of the above Headnotes, the Court dismissed the recourse.

Recourse dismissed with costs against

applicant.

Cases referred to:

Kingsfield v. Republic (1966) 3 C.L.R. 45,

HadjiEraclis and Another v. Republic (1984) 3 C.L.R. 604,

T. Z. Guarantee Developments Ltd. v. Republic (1986) 3 C.L.R. 381,

Kyriakides v. Counsil for Registration of Architects and Civil Engineers(1965) 3 C.L.R. 151,

Five Bus Tours Ltd. v. Republic (1983) 3 C.L.R. 793,

Prodromou v. Republic (1986) 3 C.L.R. 1540.

Recourse.

Recourse against the new assesments raised on applicant's chargeable income for the years of assessment 1978-1981 and to raise new assessments of the special contribution payable by him on the basis of the above assessments of his income.

A. Dikigoropoulos, for the Applicant.

A. Evangelou, Senior Counsel of the Republic, for the Respondent.

Cur.adv. vult.

DEMETRIADES, J. read the following judgment. By this recourse the applicant prays for a declaration that:

"(a) The act and/or decision of the respondent to raise new assessment on applicant's chargeable income in respect of the years of assessment 1978 -1981, as set out in respondent's letter dated the 19th September, 1985, and in the notices of the determination of objection attached thereto and also dated 19th September, 1985, is null and void and of no effect whatsoever as being contrary to the provisions of the law and/or of the Constitution and/or as having been made or taken in excess and/or in abuse of the powers vested in the Commissioner of Income Tax.

(b) The act and/or decision of the respondent to raise new assessment of the special contribution payable by applicant on the basis of the aforesaid assessments of applicant's income is null and void and of no effect whatsoever".

The applicant, who is a qualified and authorised accountant-auditor, derives his income from his practice, emoluments from employment as secretary to various companies, dividends, rents and pensions.

On the 22nd May, 1973, a private company with limited liability was incorporated under the name of NIDI Secretarial Services Ltd. (hereinafter referred to as the company) with a share capital of £40.-divided into 40 £1.-shares.

At the time of its incorporation, the shareholders of the company were the applicant holding one (1) share, the applicant's wife and his daughter Mrs. Kountouri, each holding one (1) share and his son, who lives abroad, holding the remaining 37 shares.

On the 24th November,1980, the company increased its shares from 40 to 100 £1.-shares. The 60 new shares were then allotted equally, that is 20 shares to each of the in-laws on the applicant's daughter Loizos and MyroforaKountouris and a certain EleniChristoforou at par.

On the 27th December, 1980, the new shareholderstransferred by way of gift the shares allotted to each one of them to the three children of the daughter of the applicant, that is his grandchildren.

On the 31st December, 1980, the company decided to divide its whole income for the year 1980 which amounted to the sum of £1,440-as dividend. In other words, and having, regard to the fact that the 60 shares were allotted and/or sold and/or gifted to the new shareholders at par, yielded in one month a return of 240 per centum.

It is to be noted that none of the new shareholders or the grandchildren of the applicant had income which was taxable; that no offer was made to the son who was the main shareholder in the company to buy any of the new shares and that there is no decision of the Board of Directors of the company to offer the company's shares to non-shareholders.

The company had been filing income tax returns regularly and had been assessed to income tax which it paid.

By a letter dated the 19th June, 1982, copy of which is exhibit No.1 to the application, the Commissioner of Income Tax requested the company's auditors for certain particulars with regard to the company's clients, evidence showing the appointment of the company as secretary to the clients, the names of the company's employees and the remuneration paid to them. To this letter the company's auditors replied by their letter dated the 24th October, 1983, copy of which is exhibit No.2 to the application. As it appears from this letter, the work of the company was being carried out by the directors of the company who had decided to render their services to the company gratis.

By his letter dated the 7th August, 1984 (exhibit No. 3 to the application), the Commissioner of Income Tax informed the company's auditors that in his opinion the profits of the company in each year since its incorporation ought to be assessed on the applicant for the following reasons:

(a) The services rendered by the company were actually rendered by the applicant as. no other shareholder ordirector of the company could render the services offered by the company.

(b) The applicant being the only person who could render the services in question did not receive any salary and almost the whole of the income of the company was distributed to the shareholders.

(d) Applicant's income had been reduced by acts and transactions which were artificial and that in accordance with the provisions of section 36 of the Assessment and Collection of Taxes Laws 1978-1979 were disregarded and were considered as income of the applicant.

By their letter dated the 22nd September, 1984, copy of which is attached to the application as exhibit No.4, the company's auditors objected to the decision set out in the Commissioner's letter of the 7th August, 1984, explaining that the statement of the Commissioner that the company rendered professional services through the applicant only and that no other shareholder or directors of the company could render those services was, in the light of the true facts and circumstances, incorrect in that, as stated in his letter dated the 24th October, 1983 (exhibit No.2 to the application), the work was carried out by all the directors including Mrs. Ionides and Mrs. Kountouri and they reiterated applicant's contention that the acts and/or transactions under which the shares came to be acquired by the son and grand-children of the applicant were very real transactions between the company and independent individuals of full age and could not be considered as artificial by reason of the provisions of section 36(1) of the Assessment and Collection of Taxes Laws 1978-1979. By the same letter the company's auditors requested the Commissioner to refer them to decided cases upon which he based his decision to consider the transactions in question artificial and the authority whereunder directors of a company are prohibited from rendering services to a company gratis and without claiming any remuneration.

By a letter dated the 19th September, 1985, which wasaddressed to the applicant personally, the Commissioner of Income Tax informed him that he was not prepared to change his decision which was set out in his letter of the 7th August, 1984. In the letter of the 19th September, 1985, notices of the determination of the objection of the applicant in respect of the years of assessment 1978(77), 1979(78), 1979, 1980 and 1981, as well as a notice of payment of special contribution on the basis of the aforesaid new assessments, were enclosed.

By this letter the Commissioner of Income Tax further alleged that the incorporation of the company was a means of transferring income from the applicant's practice to members of his family in that the company's business depended entirely on the applicant; its income was derived from the allocation to it of such proportion of the applicant's business, the income of which, when distributed as dividends, would be below the untaxable income of a shareholder. Finally, the Commissioner pointed out that remuneration for the services carried out by the directors of the company, who were employed by the applicant in his practice, ought to have been charged to the company and not to the applicant's practice.

Having the above in mind, the Commissioner informed the applicant by his said letter that it was evident that the scheme was artificial and that it was devised solely for the transfer of income which belonged to the applicant to his grandchildren in order to avoid payment of income tax.

The decision of the Commissioner of Income Tax, which was communicated to the applicant by the letter dated the 19th September, 1985, is now challenged by the present recourse.

The arguments of counsel for the applicant in support of the complaints of his client may be summarized as follows:

(a) The respondent acted under a misconception of fact and law as to what is an artificial and/or fictitious transaction and that he did not conduct a due inquiry in order to ascertain the correct facts of the case.

(b) In view of Article 24.2 of the constitution, any tax imposed by a law must be defined with certainty by suchlaw and any discretion that the Commissioner of Income Tax may have in assessing such tax should be exercised objectively so that a decision reached thereunder should be objectively correct and true. Under this head, it is the contention of counsel that section 2(1) of Law 4/78 provides that the amount of tax should be ascertained on the basis of objective criteria laid down in the Law and not the subjective views of the respondent; that there is no room for the exercise of discretionary powers in tax matters where the tax payable must be fixed by the law and that any legal provision to the contrary offends against Article 24.2 of the Constitution.

(c) The sub judice decision was taken in violation of the rule of natural justice in that no man will be a judge in his own cause.

It has time and again been said in a number of judgments of this Court that the Court will not interfere with the decision of an administrative organ if such decision was reasonably open to it and that an applicant in a recourse under Article 146 of the Constitution has the burden of proof to establish that the organ exceeded the outer limits of its powers.

The ligislative provision on which the Commissioner of Income Tax based his decision in this case is section 36(1) of the Assessment and Collection of Taxes Laws 1978-1979 which reads:

"36.-(1) Οσάκις ο Διευθυντής κρίνει ότι αναφορικώς προς φορολογικόν τι έτος το αντικείμενον φόρου οιουδήποτε προσώπου μειούται εκ πράξεων αίτινες, κατά την γνώμην αυτού, δεν είναι γνήσιαι ή είναι εικονικαί, δύναται να αγνόηση οιανδήποτε τοιαύτην πράξιν και να φορολόγηση τα ενδιαφερόμενα πρόσωπα επί του ορθού αντικειμένου φόρου."

("Where the Director is of the opinion that in respect of any year of assessment the object of the tax of any person is reduced by any transaction which in his view was artificial or fictitious, he may disregard any such transaction and assess the persons concerned on the proper object of the tax.")

The above provision received judicial interpretation in a number of cases (see the cases of Kingsfield v. The Republic (1966) 3 C.L.R. 45; HadjiEraclis and Another v. The Republic (1984) 3 C.L.R. 604; T. Z. Guarantee Developments Ltd. v.The Republic through the Commissioner of Income Tax of the Ministry of Finance (1986) 3 C.L.R. 381). In the latter case (at pp. 386 -387) Stylianides, J. said:

"Artificial and fictitious have no definition but hardly anyone is needed. It is for the respondent to determine from his findings of primary fact the further fact whether there was an act which was not real, an act without any commercial or business purpose apart from tax advantage.The respondent under s.36(1) is empowered to come to the opinion that not the whole transaction but a part or conditions or terms of the transaction are artificial or fictitious. It is not necessary for the transaction to be unlawful or illegal. It is sufficient if it was entered into or done only for the purpose of evading the payment of income tax."

As it emanates from the above cases the position of the Court is that if it was reasonably open to the respondent to find, on the material before him, that there was an act which had no commercial or business purpose except tax avoidance as its ultimate result, the Court will not interfere with such decision.

As it appears from the facts placed before me both in the application and the opposition to it, the written addresses of counsel, as well as the affidavits filed and the answers given by the affiants in their cross-examination, I have come to the following conclusions:-

(a) The company's income was derived from business that was channelled to it by the applicant's practice, i.e. the applicant himself.

(b) The company had no running expenses as these were born by the applicant and were charged as expenses of his practice.

(c) The directors of the company, for reasons that were notgiven to me, rendered their services gratis and thus the emoluments to which they were entitled were included in the profits that the company made and which were distributed to its shareholders as dividends.

(d) The share capital of the company was in 1980 increased by the .issue of 60 shares of the value of £1.-each and these shares were not offered to the then shareholders but were sold and/or given at par to third persons of no taxable income; and

(e) the new shareholders transferred by gift the shares so acquired by them to the grandchildren of the applicant, approximately one month after they had been transferred to them.

Having considered the arguments of counsel in the light of the evidence adduced, I find that it was reasonably open to the Commissioner, on the material before him, to arrive at the sub judice decision. and this Court cannot interfere with the exercise of his discretion. The Commissioner in exercising his discretion, had all the facts before him and there is no room in my mind to hold that he was labouring under any misconception of fact or law.

Regarding the second argument of counsel, that there is no room for discretion in taxing laws and that any provision to that effect is contrary to Article 24.2, I find no merit in it. The unconstitutionality of a legal provision has to be specifically pleaded and proved beyond any reasonable doubt. Counsel has not specifically indicated which provision he considers unconstitutional. In any event, if one assumes that he refers to the provision of section 36(1) (which has been cited before),I do not really see how does this provision offend against Article 24.2 which reads as follows:

"2. No such contribution by way of tax, duty or rate of any kind whatsoever shall be imposed save by or under the authority of a law."

Income tax is imposed on the authority of the Income Tax Laws and the amount of tax payable is assessed on the criteriaset out therein. The discretion given to the Commissioner does not concern either the kind of tax or the amount of tax, but is with regard to transactions leading to tax avoidance. If this is the case, he will consider whether such transactions are genuine or artificial and fictitious. As I said earlier, I cannot see how this provision offends against Article 24.2 of the Constitution.

As a result, this contention of counsel for the applicant is dismissed.

What remains to be considered is the last argument of counsel referring to the alleged breach of the rule of natural justice that "no man shall be a judge in his own cause".

As it has been stated in a number of cases, this rule has no application in the case of bodies or organs exercising administrative and not judicial or quasi-judicial functions. (seeKyriakides v. The Counsil for Registration of Architects and Civil Engineers (1965) 3 C.L.R. 151, at p. 159; Five Bus Tours Ltd. v.The Republic (1983) 3 C.L.R. 793 at p. 809; Prodromou v.The Republic (1986) 3 C.L.R. 1540, at pp. 1547, 1548). In the latter case a written examination was held between candidates eligible for appointment to the post of Commercial Officer. As a result of a complaint lodged by the applicant, who failed to obtain 50 or more marks, his examination papers were referred for re-examination by the same examiner. A.Loizou, J., as he then was, held at p. 1548, after making reference to other authorities, that:

"I would consider in the present case that the functions of the examiner were neither judicial nor quasi-judicial and in the circumstances the rules of natural justice have not been infringed."

In any event, in the present case, the objection lodged by the applicant was not by way of a hierarchical recourse, which must be heard by a hierarchically superior organ, but was a mere objection to the person who took the provisional decision, which did not become finalized until the objection was heard.

In the result, this recourse fails and is hereby dismissed.

In the circumstances of the case, I make an order that the applicant pays the costs of the respondent. Costs to be assessed by the Registrar.

Recourse dismissed with costs

against applicant.

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