PANAYIDES ν. REPUBLIC (1989) 3A CLR 578

Taxation - Income tax - Retirement of employee of company upon giving to the company twelve months notice of termination of his employment - Payment by company to such employee of one year's emoluments - Rightly such payment was subjected to income tax - Preference and analysis of principles derived from authorities.

Taxation - Income tax - Termination of employment by the employee giving notice of termination - Employer giving the car, which the employee had been using during the period of his employment, to such employee - The value of the car rightly subjected to income tax.

Taxation Income tax - Representation allowance - The Income Tax Law 1961- 1977, section 5(1)(b)- Such allowances the subject to income tax.

Taxation - Income tax - Representation expenses - Failure by applicant to give explanations relating to such expenses - Effect of such failure -. In the absence of evidence to substantiate assertion that applicant had incurred such expenses, it was reasonably open to respondent not to allow deduction of such expenses.

The applicant gave in accordance with a term in his agreement a 12-month notice in writing for termination of his employment as a General Manager of the Cyprus Phasouri Plantation Co. Ltd. In accordance with the contract between the applicant and the said company, the latter paid to the applicant the sum of £8.500, i.e. applicant's emoluments for one year. The company gave him also the car, which he was using, when he was holding the post of General Manager.

The issues raised in this case were the taxability of the said payment of £8.5 00, the excessiveness of the value of the car, the subjection to tax of the representation allowance that the applicant received, the refusal to deduct representation expenses as claimed by the applicant.

Having analysed various authorities on the subject, the Court concluded that in the present case the payment of £8.500 did not represent compensation for loss of office or damage for wrongful dismissal. It was obvious from the correspondence that the sum in question was paid as emoluments arising from his contract of employment.

In the light of this conclusion and of the principles, appearing in the aforesaid Headnotes, the Court dismissed this recourse.

Recourse dismissed. No order as to

costs.

Cases referred to:

Hochstrasser v. Mayes [1959] (h. 22 at.p.33:

Henry v. Foster [1931] 16 T.C. 605,

Dale v. De Soissons [1950] 32 T.C. 118,

Fitikides v. Republic (1973) 3 C.L.R. 15,

Stylianides v. CY.T.A. and Another (1989) 3 C.L.R. 5,

Neocleous v. Republic (1986) 3 CL.R. 2633.

Nicou v. Republic (1983) 3L.R. 1113,

Panayiotou v. Republic (1984) 3 C.L.R. 857,

Pavlou v. Republic (1988) 3 C.L.R. 1125,

Zevlaris v. Republic and Another (1988) 3 C.L.R. 720,

Georghiades v. Republic (1982) 3 C.L.R. 659.

Recourse.

Recourse against the income tax assessments raised on applicant for the years 1975-1977.

A. Haviaras, for the Applicant.

Y. Lazarou, Counsel of the Republic B, for the Respondent.

Cur.adv. vult.

KOURRIS, J. read the following judgment. The present recourse is directed against the decision of the Commissioner of Income Tax, hereinafter referred to as "the respondent", whereby income tax amounting to £6.496.30 was imposed upon the applicant in respect of the years 1975, 1976 and 1977.

Applicant is Mr. DafnisPanayides of Limassol who derived his income at the material time from salaried services rendered to the Cyprus Phasouri Plantations Co. Ltd as General Manager and to Agraria Limited, where he was a Director.

Under paragraph 12 of his contract of his employment with the Cyprus Phasouri Plantations Co. Ltd. he gave a 12 months' notice for the termination of his employment and the said company paid to him the sum of £8,500 which was his emoluments for one year. The company also gave him a car under registration No. EJ 489 which he was using when he was holding the post of General Manager.

Also, the applicant received in 1976 from Phasouri Plantations Co. Ltd., commissions amounting to £958 and £1,947 for the year 1977, as well as representation allowance amounting to £516 and £1000 accordingly. Also the applicant received from Agraria Limited £200 as representation allowance in respect of the years 1976 and 1977 as wellremuneration amounting to £570 and £940 respectively.

During the meeting of 15.9.1984 between the applicant and the officer examining his case, he was informed of the Commissioner's decision to assess him on the above amounts. On 18.9.1985, the Commissioner communicated his decision to applicant by letter (appendix (i) to the opposition) with the relevant notices of tax payable (appendices "j", "k", "l").

In the present case, the following issues fall for determination:

(1) Taxability of the lump sum payment amounting to £8500 which was made to the applicant on the termination of his employment.

The question whether a lump sum received constitutes income assessable to tax has given rise to considerable litigation both here and in England, where similar legal provisions are in force. The decided cases establish that, in order to be taxable such payments, must be made in respect of the employment that a pre-arranged payment which the service agreement provides shall be paid on determination of office is such payment and hence taxable, that a payment which represents compensation for loss of office is in reality damages for breach of contract and thus escapes tax and that the fact that a payment is given a particular name is not conclusive and the Court will examine the true nature of such payment.

As UpJohn, J. stated in Hochstrasser v. Mayes [1959] Ch. 22 at.p.33:

"The payment must be made in reference to the services the employee renders by virtue of his office and it must be something in the nature of a reward for services past, present or future".

Also, in the case of Henry v. Foster [1931] 16 T.C. 605, where a company's articles of association provided for the payment of "compensation for loss of office" in the event of a person ceasing to be a Director after 5 or more years' service by reason of death or any other cause other than misconduct,bankruptcy, lunacy or incompetence, it was held that the payment which the retiring Director received constituted a profit of the office of Director. Lawrence, L.J. stated "the payment to the respondent whatever the parties may have chosen to call it, was a payment which the company had to make to him as part of his remuneration for his services as Director".

Further, in the case of Dale v. De Soissons [1950] 32 T.C. 118, the assistant to a Managing Director was, under the terms of this service agreement, entitled to the sum of £10,000 if the company terminated his employment as they were entitled to do, on a specified date. It contended by the tax payer at the payment so made was not assessable to tax as it was payment for compensation for loss of office and thus in reality damages for breach of contract. This contention was rejected by the Court of Appeal, where the words of Roxburgh J., at first instance, were cited with approval: "In the present case (the taxpayer) surrendered no rights. He got exactly what he was entitled to get under his contract of employment. Accordingly the payment in my judgment, falls within the taxable class".

Also, similar judicial pronouncements were made in a number of cases in Cyprus.

In RenosFitikides v. The Republic (1973) 3 C.L.R. 15, a payment made to an employee under the terms of his employment providing for the payment of gratuity upon voluntary retirement was treated as a delayed benefit deriving from employment and as such was found to be chargeable to income tax.

The Court came to the same conclusion in AristotelisStylianides v. CY.T.A. and Another (1989) 3 C.L.R. 5 and EvrypidesNeocleous v. The Republic (1986) 3 C.L.R. 2633. The legal position in relation to the chargeability of gratuities to income tax was summarized by Pikis, J. as follows:

"I need not go through the case law so elaborately referred to by Hadjianastassiou, J. I shall only refer to the case of Corbett Duff, Dale v. Duff, Feebury v. Abbot [1941] 1 All E.R. 5112, that draws if I may say so with respect, the demarcationline between payment qualifying as benefits deriving from employment and payments outside that range of benefits. It is a fine line making it all more necessary to sift the facts relevant to the particular payment in order to ascertain its significance from the standpoint of the tax payer. If the benefit accords with the reasonable expectations of the recipient of the payment as a benefit expected to accrue from his employment, it constitutes an emolument deriving from his employment and as such liable to tax".

I am of the view that the payment under consideration in the present case does not represent compensation for loss of office or damages for wrongful dismissal for it is obvious from the correspondence between the applicant and his employer dated 29.4.1977 and 30.5.1977 (attached to the opposition as appendices E & F) that the initiative and the request for the termination of the applicant's employment came from him. It is also plainly obvious from the said correspondence, particularly paragraph 2 of the letter dated 29.4.1977 and paragraph (b) of the letter dated 30.5.1977, that the sum in question was paid to the applicant as emoluments arising from his contract of employment. Therefore, the said amount is liable to tax.

(2) Taxability of Representation Allowance and Amount to be Deducted therefrom as Representation Expenses.

The relevant legislation provision governing the taxability for sums paid to employees as representation allowances is s.5(1)(b) of the Income Tax Laws 1961-1977, which reads as follows:-

"5-(1) Τηρουμένων των διατάξεων του παρόντος Νόμου, δι' έκαστον φορολογικόν έτος επιβάλλεται, βάσει φορολογικών συντελεστών ειδικότερον εν τοις εφεξής καθοριζομένων, φόρος επί του εισοδήματος εκ των κατωτέρω αναφερομένων πηγών παντός προσώπου, του κτώμενου ή προκύπτοντος εν τη Δημοκρατία ή αποστελλομένου και λαμβανομένου εις την Δημοκρατία εκ των κατωτέρω αναφερομένων πηγών, ήτοι:-

(α).................................................................

(β) Κέρδη ή άλλα οφέλη εξ' οιουδήποτε αξιώματος ή μι- σθωτών υπηρεσιών, ανεξαρτήτως του αν το υποκείμενο της φορολογίας παρέχει τας υπηρεσίας αυτού εν Κύπρω ή αλλαχού, περιλαμβανομένης της κατ' εκτίμησιν ετησίας αξίας καταλύματος, στέγης και διατροφής ή οικίας, ως και παντός ετέρου επιδόματος χρηματικής ή άλλης μορφής, χορηγουμένου αναφορικώς προς παρεχομένας μισθωτάς υπηρεσίας".

It is obvious from above provision that representation allowances are liable to tax as allowances granted in respect of employment. The allegation that such allowances are exempt from tax cannot stand.

The same applies to the allegation that the amount which was deducted as representation expenses is inadequate. It was reasonably open to the Commissioner to reach this conclusion considering also that no evidence of any kind was adduced by the applicant to substantiate his assertion that he had incurred such expenses.

The effect of failure by an applicant to submit to the respondent Commissioner the relevant information has been commented on in a number of cases, including Nicou v. The Republic (1983) 3 C.L.R. 1113 at p. 1118, Panayiotou v. The Republic (1984) 3 C.L.R. 857, Stavros Pavlou v. The Republic (1988) 3 C.L.R. 1125, and Costas Zevlaris v. The Republic (1988) 3 C.L.R. 720. Furthermore, it is expressly provided by law and it is well settled that in tax cases the burden of proof that an assessment is excessive rests on the taxpayer.

(3) Commissions

The commissions which the applicant was assessed are the same as those declared by his employer and are shown on the document which is attached to the opposition as appendix H.

Bearing in mind that no evidence was adduced to contradict these amounts, I think that it was reasonably open to the respondent to reach the conclusion which he did.

(4) Value of Car EJ 489 which was transferred to the applicant on the termination of his employment.

The car in question is a Wolsely and was purchased by the applicant's employer in 1971 for £1,460.

Bearing in mind the increase in car prices in the period 1971-1977, as well as the fact that the car was used by the management and was, therefore, in good condition, and taking into consideration the fact that no evidence was adduced proving otherwise, I am of the opinion that the respondent's decision to value the vehicle at £500 was reasonably open to him.

The allegation that the sub judice decision lacks due reasoning cannot stand. The reasons behind the respondent's decision were conveyed to the applicant orally at a meeting which took place on 15.9.1984 between himself and the officer examining his case, as well as in writing on 18.9.1985 (appendix (i) attached to the opposition).

The jurisdiction of the Court is confined to a review of the legality of the action of the administration within the compass of their authority. Provided they operate within the framework of their powers, the administration is the arbiter of the fact-finding process. And so long as inquiry into the factual background is adequate and the decision is reasonably open to the administration, the Court will sustain it as a valid exercise of their powers. (Georghiades v. The Republic (1982) 3 C.L.R. 659).

It is evident from all the foregoing and from the facts set out in the opposition and the attachments thereto, that the inquiry which the respondent carried out into the factual background was adequate. Furthermore, in the circumstances of the present case, it was reasonably open to the respondent to reach the sub judice decision.

For all the above reasons, the recourse is dismissed, but with no order for costs.

Recourse dismissed. No order as

to costs.

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