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ΠΑΓΚΥΠΡΙΟΣ ΔΙΚΗΓΟΡΙΚΟΣ ΣΥΛΛΟΓΟΣ
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(1989) 3A CLR 269
1989 February 25
[KOURRIS, J.]
IN THE MATTER OF ARTICLE 146 OF THE CONSTITUTION
ANDREAS KASINOS INSURANCE LTD.,
Applicants,
v.
THE REPUBLIC OF CYPRUS, THROUGH THE COMMISSIONER
OF INCOME TAX AND ANOTHER.
Respondents.
(Case No. 792/86)
Taxation - Income Tax - Deductible expenses - The Income Tax Laws 1961-1981, sections 11(1) and 13 - The provisions of section 11(1) should be read together with section 13 and in particular with paragraph (e) thereof- Remuneration of director of company limited by shares - Part only allowed as deductible expense - In the circumstances decision reasonably open to the director.
Taxation - Income Tax - Assessment of facts - Interference by Court - Principles governing such interference.
In this case, the Commissioner of Income Tax, having ascertained after inquiry that Mrs. Glykeria Kassinou - one of the directors of the applicants - was not rendering full time service to the company, that she had a close relationship with the other directors, that her services to the company could not exceed the value of £600 and that in any event by reason of her other duties in the family house, she could not render full time services to the company, did not allow a deduction of the whole of her stated salary (1,800), but allowed only £600.
The Court held that in the circumstances the decision was reasonably open to the respondent. Section 11(1) for the aforesaid Laws should be read subject to the provisions of section 13 and, in particular paragraph
(e) thereof, which provides that to be deductible the expenditure must be money wholly and exclusively set out or expended for the purposes of acquiring the income.
The fact that the said director in her own declaration of tax stated her income to be £1800 is neither here nor there. The point in issue is whether the sum paid to Mrs. Kassinou was qualified in toto as a deductible expense for income tax purposes regarding the applicant company.
Recourse dismissed with costs against
the applicant.
Cases referred to:
Koussoumides v Republic (1966) 3 C.L.R. 18,
Makrides v. Republic (1967) 3 C L.R. 147.
Georghiades v. Republic (1982) 3 C.L.R. 659,
Manufacturers Life Insurance Ltd. v. Republic (1967) 3 CL.R. 460,
Shoemex Limited v. Republic (1987) 3 C L.R. 407,
Hadjisavva v. Republic (1972) 3 C.L.R. 174,
Ionides v. Republic (1982) 3 C L.R. 1136.
Recourse.
Recourse against the income tax assessment raised on applicants for the year of assessment 1980.
I. Typographos for C. Tsirides, for the Applicants.
Y. Lazarou, Counsel of the Republic B, for the Respondents.
Cur. adv. vult.
KOURRIS, J. read the following judgment. By the present recourse, applicant challenges the validity of the decision of the Commissioner of Income Tax contained in his letter of 29.11.1985, whereby tax amounting to £529.85, was imposed upon the applicant company in respect of the year of assessment 1980.
Facts:
The applicant is Andreas Kassinos Insurance Ltd. of Limassol, a private company of limited liability, registered on 16.7.1979. The authorised share capital of the applicant company on 31.12.1980 was 10,000 shares of £1 each and its issued and paid up share capital was 10 shares of £1 each held by Andreas Kassinos, husband (7 shares); Glykeria Kassinou, wife (1 share); Charalambos Kassinos (1 share) and Argvroulla Kassinou, (1 share) both children of the above shareholders. Mr. Andreas Kassinos and Mrs. Glykeria Kassinou were also the Directors of the company. The applicant company derived its income during the material time from commissions received from other insurance companies in respect of premiums on insurance contracts issued to clients procured by the applicants. The accounts of applicants for the year 1980 were submitted on 22.7.1982. The profit and loss account was debited with £6,087 as Directors' remunerations, £4,261 for Andreas Kassinos and £1,826 for G1vkeria Kassinou (wife).
On 19:7.1985, a notice of assessment for the year 1980 was issued to applicant company for the purpose of collecting the tax shown in the computation submitted. This notice of assessment was accompanied with a letter informing applicants that the assessment was based in its own return and it was liable to revision by the examination of the accounts.
On 1.8.1985, a notice of assessment for the year 1980 was forwarded to Mrs. Glykeria A. Kassinou based on her own income tax return for the purpose of collecting the tax not in dispute, i.e. on £1,800 directors remuneration declared plus £20 income on the assessed value of her residence. The accounts of the applicant company for the year 1979 and 1980 were examined in November, 1985 and among other expenses claimed, the point as to the appropriate charge for thrector's remuneration was raised. The assessor who examined the accounts had information that Mrs. Glykeria Kassinou was not rendering full time services to the company and that in fact all business transactions were effected by Mr. Andreas Kassinos who had the knowledge and experience of an insurance agent due to his previous employment with other insurance companies.
The examining officer carried out an inquiry which showed that Mrs. Glykeria Kassinou was not a full time employee of the company. He visited the business premises of the company which were the same as the residence of the Directors, saw personally Mr. Andreas Kassinos, the Managing Director, who informed him that his wife does not issue any proposals for insurance contracts nor does she prepare any other documents or issue any receipts or make any entries in the books of the company, but that the only service rendered by her is the delivery of insurance contracts to the company's clients.
The examining officer took also into account the fact that Mrs. Glykeria Kassinou had to look after the maintenance of their residence and the looking after of their two children born in 1967 and 1969 and she thus had no time left for rendering services to the company.
On the basis of his findings, he submitted the case to the officer in charge of the district who adopted his decision to restrict the amount of remuneration relating to Mrs. Glykeria Kassinou from £1,826 to £600 only.
On 29.11.1985, the respondent communicated his decision to amend the income tax computation for the years of assessment 1979 and 1980 by letter addressed to the company's auditors with a copy to the applicant company, accompanied by a notice of assessment (appendix D to the opposition).
Applicant company objected against the assessment for the year 1980 through their new auditors Messrs. Constantinou and Economides, by their letter dated 20.12.1985.
The auditors gave the following grounds of objection relating to the restriction of the Director's remuneration:
(a) the amount of £1,800 was credited to her current account by way of salary for the year 1980;
(b) the amount of £ 1.800 could not be reduced as Mrs. Kassinou was working for the company up to 1984 and that she happened to be also Director and shareholder;
(c) Her contribution to the increase of the company's business was more than that of a mere employee;
(d) The salary of £150 per month was not high for a Director of an insurance company;
(e) The salary was not paid or drawn from her account during the year 1980 but was drawn in 1981 and that the drawings were part of £9,707 which were drawn by her husband during 1981. Similarly, her salaries for the years 1981, 1982 and 1983 were transferred from her own current account to that of her husband, as it is shown in the accounts for the year 1983.
On 5.2.1986, the respondent issued to the applicant a Notice of Assessment for special contribution for the four quarters of the year 1980 (appendix F to the opposition). Applicant objected against this assessment through its accountants Messrs. Constantinou and Economides by their letter dated 11.2.1986 which is attached as appendix G to the opposition.
Applicant's objection was determined by the respondent's decision which was communicated to the company by his letter dated 2.10.1986 (appendix H to the opposition), together with a Notice of Assessment for the year of assessment 1980 and a notice of assessment for special contribution for the four quarters of the year 1980.
The reasons for which respondent had decided to restrict the remuneration of Mrs. Glykeria Kassinou are the following:-
(a) She was not rendering full-time services to the company and thus the amount in excess of £6000 was considered as not an expense wholly and exclusively incurred for the production of the income of the company;
(b) The payment of £1,800 director's remuneration was not to be considered as a proper transaction in view of the close relationship between the Directors who had absolute control of the company and they could take any decision they wished;
(c) The amount of £1,800 was not in fact salary as stated in the letter of Objection, as it was not paid monthly and in fact it was not paid at all in 1980 or any subsequent years but it was transferred to the credit of the account of her husband who was the controlling shareholder/director;
(d) She did not have any past experience or knowledge about insurance business or transactions and the services she could render to the company, on a part time basis, could not exceed the value of £600 including her duties as Director;
(e) Upon inquiry made by the respondent, it was determined that she could not render full time services to the company - apart from the information given by the Managing Director that the only services rendered by his wife were those of delivering insurance contracts to the clients - Mrs. Kassinou had to look after the maintenance of their house and her family.
The applicant company, feeling aggrieved with the decision of the respondent Commissioner, filed the present recourse alleging, mainly that the respondent Commissioner failed to carry out due and proper inquiry, into the facts and circumstances of the present case and that the respondent Commissioner acted under a misconception of facts and or law; also that the decision lacks due reasoning.
The Law:
In view of the presumption of legality of administrative acts, the sub judice assessments should be presumed to be valid unless the applicant succeeds to prove the contrary. In the case of Koussoumides v. The Republic (1966) 3 C.L.R. 18, it was established that in a recourse to the Supreme Court under Article .146 of the Constitution it is on the applicant on whom lies the initial burden of proof to satisfy the Court that it should interfere with the subject matter of the recourse. This was followed in the case of Rallis Makrides v. The Republic (1967) 3 C.L.R. 147 at p. 153. In the case of Lillian Georghiades v. The Republic (1982) 3 C.L.R. 659, at pp. 667-669, the Full Bench of the Supreme Court has made it abundantly clear that if the respondent's decision is one which was reasonably open to them, then this Court will not disturb same. Furthermore, in income tax cases it is expressly stated in the relevant laws that the burden to satisfy the Court that an assessment is excessive, is on the person who attacks same. (See s. 21(2) of the Assessment and Collection of Taxes Laws 1978-1979). This law applies also to the special contribution cases by virtue of s.6 of Laws 34/78 and 55/74.
The issue which falls for determination in the present proceedings is whether the amount which was shown in the applicant's account in 1979 and 1980 as remuneration to Mrs. Glvkeria Kassinou, a shareholder and director of the company, qualifies in toto as a deductible expense for income tax and special contribution purposes.
The legal provisions relevant to the issues under consideration are contained in ss. 11 and 13 of the Income Tax Laws 1961-1981. Section 11(1) deals with allowable deductions and provides, inter alia, that in ascertaining the chargeable income of any person there shall be deducted all outgoings and expenses wholly and exclusively incurred in the production of the income. This section, however, should be read subject to the provisions of s.13 which expressly prohibits certain deductions and in particular paragraph (e) which provides that to be deductible the expenditure must be money wholly and exclusively set out or expended for the purposes of acquiring the income.
The expression "for the purposes of acquiring the income" has been the subject of judicial interpretation. One of these case is Manufacturers Life Insurance Ltd. V. The Republic (1967) 3 C.L.R. 460 where Loizou, J. at p. 471 said:
It clearly appears from the above cases that for a payment to qualify as a deductible expense for income tax purposes it may be a payment connected with the trade or business carried on and made in order to enable the taxpayer the better to carry on his trade or business for the purpose of earning the income whether by getting rid of onerous service agreements or for the purpose of maintaining a high standard of business."
Again, Pikis, J. stated in Shoemex Limited v. The Republic (1987) 3 C.L.R. 407 at 409:
"The colour given to a payment by the taxpayer is no basis for a deduction unless the facts viewed in the correct perspective justify the deduction. As observed in Coates v. Arndele Properties Ltd. [1985] 1 All E.R. 15, the colour in which facts are painted is never sufficient to justify a deduction."
And at p. 410 he said:
English cases cited by Mr. Evangelou suggest that payment made by the taxpayer to members of the family or to a Director of a company on account of love and affection are not generally regarded as payments made for business considerations".
In the present case, as is evident from the facts set out hereinbefore, the examining officer carried out a proper inquiry into the nature of the services rendered by Mrs. Glykena Kassinou which revealed, inter alia, that she did not render full time services to the applicant company, that the services which she did render were confined to delivering insurance contracts to the applicant's clients, that most of her time was spent in maintaining her home and looking after the young children and that she had never actually received the remuneration which was shown in the accounts in 1980 and in subsequent years, as such remuneration was credited to her husband's account who was the controlling shareholder and Managing Director.
Consequently, I am of the opinion that under such circumstances, the respondent's decision to reduce the remuneration to be allowed as a deductible expense was reasonably open to him and the allegation of the respondents that he failed to carry out a due inquiry into the matter cannot stand. The applicants alleged that the repondent-Director did not take into account the fact that Mrs. Glykeria Kassinou paid income tax on the sum of £1,836 and that the applicants paid the appropriate sum on this amount to the Social Insurance Fund. They raised this point to allege that there has been no due inquiry into the matter. I am of the view that rightly the respondent Commissioner did not take into consideration the fact that Mrs. Kassinou paid income tax on the sum of £1,836 because it is entirely irrelevant to the point in issue which is whether the sum paid to Mrs. Glvkeria Kassinou was qualified in toto as a deductible expense for income tax purposes regarding the applicant company.
Regarding the allegation that the decision lacks due reasoning, it appears to me that the decision contained in the letter dated 2. 10.1986 (Appendix H to the opposition), fails to state the reasoning behind the decision. However, counsel for the respondents stated that this was due to an oversight and referred the Court to official records, extracts of which he attached to his written address where the decision is adequately reasoned. It has been held time and again that the reasoning behind a decision may be found either in the decision itself or in the official records related thereto. (Georghios Hjisavva v. The Republic (1972) 3 C.L.R. 174, and lonides v. The Republic (1982) 3 C.L.R. 1136).
In conclusion, I am satisfied that the sub judice decision is duly reasoned.
For all the above reasons, the recourse is dismissed with costs against the applicant. Costs to be assessed by the Registrar.
Recourse dismissed with costs
against applicant.