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ΠΑΓΚΥΠΡΙΟΣ ΔΙΚΗΓΟΡΙΚΟΣ ΣΥΛΛΟΓΟΣ
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(1989) 3A CLR 638
1989 May 31
[A. LOIZOU. P.]
IN THE MATTER OF ARTICLE 146 OF THE CONSTITUTION
PANAYIOTIS THRASIVOULOU LTD,
Applicants,
v.
THE REPUBLIC OF CYPRUS, THROUGH THE DIRECTOR OF
INLAND REVENUE DEPARTMENT,
Respondents,
(Case No. 293/87)
Taxation-Income Tax-Finance of Directors by company through obtaining of a Bank loan-Whether interest corresponding to amount of Directors borrowing payable to the Bank can be deducted as an expense-Question determined in the negative-The Income Tax Laws, sections 11(1) and 13(e).
Taxation-Income Tax-Capital allowances-Purchase of private cars by company (a station wagon and an estate type of car)-Notwithstanding that the vehicles in the present case may have been used for the carriage of goods; they could not be classified as plant and machinery in the sense of the Law, because the test of determining their character is their classification under the Road Traffic Regulations and not the use made of them by the owner-In accordance with the said Traffic Regulations the said vehicles are classified as private vehicles-It follows that the decision not to allow capital allowance in respect of them was correct in Law.
The factual and legal issues raised and determined by the Court in this case appear sufficiently in the hereinabove Headnotes.
Recourse dismissed. No order as to
costs.
Cases referred to:
Konaris and Another v Republic (1988) 3 C.L.R. 957,
Union Cold Storage Co. Ltd. v. Jones (Inspector of Taxes) 8 Tax Cases 725,
Melik .Melikian and Co. Ltd. v. Republic (1985) 3 C.L.R. 1322,
Stilvi General Cleaners Ltd. v. Minister of Finance and Another (1988) 3 C.L.R. 51.
Recourse.
Recourse against the income tax assessment for the years 1980-1984 and against the special contribution assessments for the quarters 2/80,4/80,1/81-4/81,1/82, 3/82,4/82, 3/83, 3/84 and 4/84 raised on applicant.
T. Papadopoulos, for the Applicant.
Y. Lazarou, Counsel of the Republic B, for the Respondent.
Cur. adv. vult.
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, 1/82, 3/82, 4/82, 3/83, 3/84, 4/84, which were raised and determined as shown in the Schedules, attached to the opposition and marked as Appendix "A", and Appendix "B". The applicant Company is a private Company of limited liability incorporated on the 20th April 1978. The authorised share capital of the applicant Company at all material 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, which derived its income during the material time from trading in dairy products and provisions in general.
The applicant Company submitted income tax returns and audited accounts through its auditors Messrs Metaxas, Loizides, Syrimis, Christofides and Co., for the years of assessment 1980- 1983 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 discussed with the applicant Company's auditors at a meeting on the 19th April 1986 (before raising assessments and before filing objection) at the Income Tax Office, Larnaca. Present were Mr. Costas Christofides of the said auditor and Mr. Kyriakos Neocleous, Senior Assessor of the Income Tax office.
At the above meeting an agreement was reached between 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 1980- 1984 are original assessments and so are the special contribution assessments for all the quarters in question. The basis on which the respondent raised the aforesaid assessments is indicated in his letter dated the 25th April 1986, a copy of which is attached to the Application, as Exhibit 2.
The applicant Company objected through its auditors against the above assessments by their letter dated the 27th May 1986. The grounds for the objection (Appendix "C" to the opposition); are briefly the following:-
"(i) that they disagreed with the disallowance of capital allowances on motor vehicles Reg. Nos. LE 450 and DT 675.
(ii) that they disagreed with the disallowance of interest paid on its directors debit balances on current bank accounts".
The respondent maintained his original decision, determined the objections accordingly and informed the applicant Company of his duly reasoned decision by letter dated the 22nd January 1987 (Exhibit 1) and by final Notices of Assessment for Income Tax and Special Contribution dated the 30th January 1987, which were also attached to the Application.
I find it useful to set out verbatim the contents of paragraph 11 of the opposition which contains the approach of the respondent:
"The points at issue in the present recourse and the grounds on which the Respondent, based his decision in respect of each of these points are as follows:
(i) Disallowance of interest on Directors debit balances on current accounts:-
Over the years 1980 to 1984 the following amounts were charged to the company's profit and loss account representing bank interest and bank charges:
1980 £1,949
1981 £2,120
1982 £2,755
1983 £2,830
1984 £2,605
In the same years the company financed its directors with the amounts shown in column (1) herebelow whereas the amounts due by the company to various banks were as shown in column (2) herebelow:
(1) (2)
Amounts due to Directors Amounts due to Banks
£ £
01.01.1980 16, 658 20, 279
31.12.1980 22, 363 27, 365
31.12.1981 22, 874 29, 882
31.12.1982 16, 344 30, 631
31.12.1983 27, 410 31, 964
31.12.1984 27, 831 32, 638
It should be noted that the company was incorporated in 1978 and at the end of that year i.e at 31.12.1978, the amounts due to the various banks amounted to £15,035 whereas the amounts due to the company from its directors amounted to £16,165. As can be seen the company since its incorporation utilized the bank 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 and the provisions of section 13(e) of the 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 extent to which the corresponding borrowed funds were applied in financing loans to the company's directors.
The amount disallowed in each year was estimated on the basis of the average of the amounts outstanding at the beginning and end of the year at 9% per annum and is as follows:
1980 1,756
1981 2,120
1982 1,932
1983 1,969
1984 2,486
(ii) Capital allowances on a station wagon and estate type motor vehicles.
The respondent having in view 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 LE 450, Estate, as follows:
Year Wear & Tear Allowances, Investment Allowances
1980 £1, 390 £1, 845
1981 1, 390
1982 1, 390
1983 1, 230
1984 1, 230
£6, 630 £1, 845
The said vehicles purchased in 1978 and 1980 respectively are private motor vehicles within the meaning of sub-para (v) of para (7) of Reg. 17 of the Motor Vehicles and Road 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."
As regards the interest paid on amounts due to various banks in order, as it is evident, to finance the personal drawings of its directors rather than for the purpose of producing the income, I consider that it was correctly submitted on behalf of the respondent that such was rightly disallowed, as such amounts were not expended for the purpose of the trade of the applicant Company. In the case of Konaris and Another c 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 1961-1963, 1 held the view that:
"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 Taxes) 8 Tax Cases 725, where the Court of appeal held at p. 738 that:
"Deductions may be allowed in respect of money wholly and exlusively laid out or expended for the purposes of the trade, manufacture or concern of the subject making the 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 which is laid out, first of all, for the purposes of the trade, and, secondly, laid out wholly and exclusively for the purposes of the trade, and unless the expense incurred can be brought within these words which are narrow words the deductions cannot be allowed. It is quite plain the intention of the Legislature was not to make a broad general rule that whatever a subject likes to expend in his business could be deducted but only such sums were to be allowed to which the character could be assigned that they had been wholly and exclusively laid out for the purposes of the subject's business.
Secondly, as regards the allowances on a station wagon and estate type motor vehicles as such are considered as private within the meaning of the Law, (see Regulation 17 of the Motor Vehicles and Road Traffic Regulations 1973-1978), the fact that the vehicles in the present case may have been used for the carnage of goods does not render them plant and machinery in the sense of the Law. This view was also held in the decision of the Full Bench of this Court in the case of Melik Melikian and Co. Ltd. v. The Republic (1985) 3 C.L.R. 1322. See also Stilvi 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 Regulations and not the use made of it by its owner. Such classification is solely dependent on the provisions of the 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 recourse fails and is hereby dismissed. No order as to costs.
Recourse dismissed. No order as
to costs.