Cylaw

SINGER SEWING ν. REPUBLIC (1978) 3 CLR 71

(1978) 3 CLR 71

[*71] 1978 March 4

[A LOIZOU, J.]

IN THE MATTER OF ARTICLE 146 OF THE CONSTITUTION

THE SINGER SEWING MACHINE COMPANY,

Applicant,

THE DIRECTOR OF THE DEPARTMENT OF

INLAND REVENUE

Respondent.

(Case No. 313/76).

Special Contribution (Temporary Provisions) Law, 1974 (Law 55 of 1974 as amended)-Ascertainment of income for purposes of contribution thereunder-Deductions-Losses sustained in previous quarters-Are not allowable deductions-Paragraph 2 (c) of the Schedule to the Law.

Constitutional Law-Constitutionality of legislation-Judicial control-Taxation legislation-Principles applicable-Special Contribution (Temporary Provisions) Law, 1974 (Law 55 of 1974 as amended), sections 3 and 6 and paragraph 2 (c) of the Schedule to the Law-Not unconstitutional as being contrary to paragraphs 1 and 4 of Article 24 of the Constitution.

Special Contribution (Temporary Provisions) Law, 1974 (Law 55 of 1974 as amended) sections 3 and 6 and paragraph 2 (c) of the Schedule thereto not contrary to paragraphs 1 and 4 of Article 24 of the Constitution.

In computing applicant’s income for the purposes of special contribution under sections 3 and 6 of the Special Contribution (Temporary Provisions) Law, 1974 (Law No. 55 of 1974 as amended by Law 43 of 1975), in respect of the quarters ending 31.3.1976 and 30.6.1976, the respondent Director disallowed losses sustained by applicant in previous quarters. This decision [*72] was taken under paragraph 2 (c) of the Schedule to Law 55/74 which reads as follows:

“2. Subject to the provisions of paragraph 3, in ascertaining the income there shall be allowed all deductions under the Income Tax Laws 1961 to 1973, with the exception of the following:

(a)…

(b)…

Counsel for the applicant contended (a) that the expression “loss carried forward from previous years” refers to losses which a person is entitled to carry forward as at 31.12.1973, whether they are losses sustained in 1973 or balances of losses of previous years, under section 15 of the Income Tax Laws 1961-1976; and that in any event the applicant did not seek to transfer and carry forward losses from “a previous year” but losses from a previous quarter or quarters, i.e. from a quarter in respect of which the applicants were liable to special contribution under the said Law 55/74, as amended, and nothing in the said Law prevents such a transfer.

(b) That the relevant provisions of Law 55/74 are unconstitutional as infringing paragraphs 1 and 4 of Article 24 of the Constitution.

(Editor’s note: The statutory provisions claimed to be unconstitutional were not referred to specifically and the Court took it that the ground of unconstitutionality referred to sections 3 and 6 of the Law and to paragraph 2 (c) of the Schedule to the Law).

Held, (1) it is obvious from the clear and unambiguous wording of the said paragraph 2 of the Schedule to the Law that the only deductions that can be allowed are those which are allowable under the Income Tax Laws with three exceptions out of which one is the “losses carried forward from previous years”. This exception, though an allowable deduction under section 15 of the Income Tax Laws, is expressly excluded by Law 55/74 which treats the quarter for the purposes of this type of taxation[*73]as an entity, in itself and tax is levied on the income of each quarter by ascertaining it without authorising the previous losses to be carried forward and made an allowable deduction from the income of a subsequent quarter. Consequently, the respondent’s decision to disallow the losses of the applicant Company in respect of the years 1974-1975 in computing its income for the quarter 1.1.1976 - 31.3.1976 for the purposes of special contribution under Law 55/74, is a correct one.

(2) The same approach governs also the decision of the respondent under the said paragraph 2 (c) of the. Schedule to the Law, with regard to the contribution to be levied on the income for the quarter ended 30.6.1976. Though paragraph 2 (c) was amended by Law 15/76, by the addition of a proviso to the effect that the amount of the loss of one quarter may be carried forward and be set off with the .income of subsequent quarters, the amendment came into force on the 1st April, 1976 and the applicant Company had no losses during the quarters ended on 31.3.1976 and 30.6.1976.

(3) (After stating the principles that should guide Courts when considering the question of constitutionality of a statute and the exercise of judicial control of legislative enactments- vide pp. 82-84 post). In determining the constitutionality of the Law, the social, economic and other conditions which called for such legislation cannot be ignored; and in this instance Law 55/74, or any other subsequent enactment substituting same, has to be viewed in the light of the tragic events of 1974 and the disruption of the economy of the Island that resulted there from and the social and economic needs which had to be met by expenditure and for which revenue had to be raised as a matter of urgency. Moreover in matters of taxation the legislature must be allowed great freedom in classification and a large area of discretion is needed by a legislature in formulating sound tax policies (See Matsis v. Republic (1969) 3 C.L.R. 245 at p. 262, Anastassiou v. Republic (1977) 6 J.S.C. 971 at p. 1032). Also “income as a basis for taxation on a large scale is a sufficiently reasonable and equitable criterion so as to ensure that the principle of equality is not infringed” (See HjiKyriacos& Sons Ltd., 5 R.S.C.C. 22).

(4) The fact that a tax is levied on the income of a person in respect of a particular period without allowing[*74]the deduction of the losses of a previous quarter or quarters, does not violate in any way Article 24.1 of the Constitution in the sense that one is not asked to contribute only according to his means. Nor is the contribution imposed of a destructive or prohibitive nature, contrary to Article 24.4 of the Constitution, because looking at the rates of Contribution, as set out in the Schedule to the Law, there, is a tax free allowance on the first £120 of the income of a quarter and then there is a progressive escalation of tax starting from 100 mils and going up to 250 mils, the latter being only payable in respect of income during a particular quarter which is in excess of £1,000. (pp. 83-84 post).

Application dismissed.

Cases referred to:

Board for Registration of Architects and Civil Engineers v. Kyriakides (1966) 3 C.L.R. 640 at p. 645;

Lehnhausen v. Lake Shore Auto Parts Co. 35 L. Ed. 2d 351;

Anastassiou v. The Republic (1977) 6 J.S.C. 971 at p. 1032 (to be reported in (1977) 3 C.L.R.);

Madden v. Commonwealth of Kentucky, 84 Law. Ed. 590 at p. 593;

Matsis v. The Republic (1969) 3 C.L.R. 245 at p. 262;

HjiKyriacos& Sons Ltd., 5 R.S.C.C. 22.

Recourse.

Recourse against the validity of assessments to special contribution raised on applicants for the quarters ended 31.3.1976 and 30.6.1976.

A. Markides, for the applicant.

A. C. Evangelou, Counsel of the Republic, for the respondent.

Cur adv. vult.

A. LOIZOU J. read the following judgment. In this recourse the applicant company prays for the following relief:

“1. A declaration to the effect that the Assessments to Special Contribution under Nos. A 2865/1/76/X and A 2865/2/76/X raised by the respondent on the applicant company in respect of its income liable to special contribution for the quarters ended 31.3.76 and 30.6.76 on an[*75]income of £7,950.- and £9,467.- respectively, are null and void and of no effect whatsoever.”

The applicant company is the Cyprus Branch of the Singer Sewing Machine Co., of New York, trading for many years here and deriving its income from the import and sale of sewing machines, refrigerators and washing machines of their manufacture.

It has been submitting annually to the respondent in his capacity as the Commissioner of Income Tax, audited accounts together with computations of chargeable income, for the assessment of its profits for income tax purposes.

It also prepared for internal purposes, monthly accounts which, on 3.7.74, showed that it had made during the period 1.1.74 - 31.7.74 a profit of £28,619.-but, as stated in para. 4 of the Application:-

“Due to the catastrophic effects of the Turkish invasion on 20.7.1974, not only was this profit absorbed by the losses the Company sustained from September to December, 1974, but was eventually turned into a loss of £16,365.- as disclosed in the audited accounts for 1974 prepared by the Company’s Auditors mainly for the reason that the Company had to write off at the end of the financial year 1974:

(a) Stocks seized by the Turks worth at cost £17,668.-

(b) Debts which had become irrecoverable £22,111.-

£39,779.-”

The applicant company was also declared by the Ministry of Labour and Social Insurance as an “affected undertaking” for the purposes of the Emoluments (Temporary Reduction) Law, 1974 (Law No. 54/74).

After the enactment of the Special Contribution (Temporary Provisions) Law of 1974, (Law No. 55/74) covering the quarter commencing on 1.10.74, the applicant Company submitted on the 3rd March, 1975 its first returns of income for the quarter ending 31.12.1974 in which it declared a loss of £3,510. This was made prior to the closing of its accounts by the auditors[*76]and the writing off of the stocks and bad debts referred to above for the preparation of final accounts for the year ended 31.12.1974 and which final accounts revealed that the loss for the said quarter was £16,365.

On the 10th June, 1976 and 23rd September, 1976 the applicant company submitted returns of income (Form IR 265) in respect of the quarters ended 31st March, 1976 and 31st June, 1976 respectively, declaring as follows:

“Quarter ended 31st March, 1976.

Profit for the quarter, £7,950.-

Less Loss brought forward from previous years £73,165.-

Loss to carry forward £65,215.-

Quarter ended 30th June, 1976

Profit for the quarter £9,467.-

Less Loss brought forward £65,215.-

Loss to carry forward £55,748.-”

Therefore, on the 30th September, 1976 Notices of Contribution were sent to the applicant company for the quarters ended 31st March, 1976 and 30th June, 1976 together with a letter in which it was stated, that the Director of the Department of Inland Revenue, upon examining their returns of income, decided that losses sustained in any quarter during the period 11.10.74 to 3 1.3.76 were not transferable to the following quarter of the same period nor to any subsequent one.

The applicant company by letter dated 11.10.76 objected to the contribution so levied on the following grounds:-

“(a) The Company has had no income liable to extraordinary contribution in respect of either of the aforesaid two quarters for the reason that it had to carry forward losses from the previous quarters which exceed by far the profits declared in respect of each quarter.

(b) The interpretation placed by your office on the provisions of the relevant Law is not correct. The Law prohibits the transfer of losses from previous years, i.e.[*77]the year 1973 or any earlier year, but does not prohibit the transfer of losses from quarter to quarter.

The respondent Director determined the said objection under section 20 (5) of the Taxes (Quantifying and Recovery) Law of 1963 (Law No. 53/63), as amended by Law 61/69, and rejected same. His decision was communicated to the applicant company by letter dated 18th November, 1976 with the relevant Notices of Contribution attached thereto.

It is the case for the respondent that the acts and/or decisions complained of were properly and lawfully taken after all relevant facts and circumstances were taken into consideration, namely,

“(a) The Special Contribution for the quarter ended 31st March, 1976 was levied under Sections 3 and 6 of the Special Contribution (Temporary Provisions) Law, 1974 and 1975, Section 11 of the Special Contribution (Temporary Provisions) Law, 1976 and Sections 3 and 13 (2) (b) of the Taxes (Quantifying and Recovery) Law, 1963 (Law No. 53/63) as amended by Law No. 61 of 1969.

(b) The Special Contribution for the quarter ended 30th June, 1976 was levied under Sections 3 and 6 of the Special Contribution (Temporary Provisions) Law, 1976 and Sections 3 and 13 (2) (b) of the Taxes (Quantifying and Recovery) Law, No. 53 of 1963 as amended by Law No. 61 of 1969.

(c) The respondent director of the Department of Inland Revenue did not allow losses sustained in one quarter to be transferred and set off against the income of the quarters ended 31st March, 1976 and 30th June, 1976, pursuant to sub-para. (c) ofpara. 2 of the Schedule to the Special Contribution (Temporary Provisions) Law 1974 and 1975.”

The applicant Company has challenged these decisions by the present recourse duly filed within the time prescribed by Article[*78]146.3 of the Constitution and bases same on the following grounds Of Law:-

“1. The respondent has wrongly ruled that losses sustained in one quarter cannot, for the purposes of imposing special contribution pursuant to the provisions in Law No. 55 of 1974, be transferred and set off against any income of the following quarter or quarters.

2. Sub-para. (c) ofpara. 2 of the Schedule to Law No. 55 of 1974 prohibits for the purposes of special contribution the transfer of losses of “previous years”, not of losses from one quarter to the following.

3. The expression “losses which are transferred from previous years” in the aforesaid sub-para. (c) should be construed in its ordinarily understood meaning an4 the correct interpretation to be given to it is that it refers to losses which a person is entitled to carry forward as at 31st December, 1973 (whether they are losses incurred in 1973 or balances of losses of previous years), under Section 15 of the Income Tax Laws, 1961 to 1976.

4. The disallowance of the transfer of losses from one quarter to another was ordered by the respondent in a, departmental circular No. 206 dated 22.11.74. This circular is not, a law.

5. The correctness of the interpretation that losses sustained in one quarter could be transferred to the following quarter was eventually recognised and admitted by the insertion of a specific provision therefor in Law No. 15 of 1976, which replaced Laws Nos. 55 of 1974 and 43 of 1975, please see proviso to sub-para. (c) ofpara. 2 of the Schedule to the new law.

6. Any other interpretation would render the law oppressive and unconstitutional.”

Sections 3 and 6 of the Special Contribution (Temporary Provisions) Law, 1974 (Law No. 55/74), as amended by Law 43/75 under which the special contribution on the applicant company was levied, read:

“3. For the quarter beginning as from the 1st October, 1974, and for every subsequent quarter during the period[*79]when this Law shall be in force, there shall be levied and paid a contribution at the rates and in accordance with the provisions set forth in the Schedule, on the income of every person which is derived from any source other than emoluments in respect of any office or employment, in respect of which a provision for reduction has been made under the Emoluments (Temporary Reduction) Law, 1974 or from rents in respect of which a provision by reduction has been made under the Rent Restriction Law, 1975.”

6. The provisions of the Income Tax Laws 1961 to 1973 and of the Taxes (Quantifying and Recovery) Laws, 1963 and 1969 shall apply, mutatis mutandis, subject to the amendments set forth in the schedule, but no personal allowance shall be granted and no income shall be exempt from the contribution save the income of an owner of a Cyprus ship as referred to in section 3 of the Merchant Shipping (Taxing Provisions) Laws 1963 to 1973, including any income derived from the management of a Cyprus ship, the income remitted from abroad of an alien individual not having his permanent residence in Cyprus, as well as the income by way of interest on foreign capital being exempt by virtue of s.10 of the Income Tax Laws 1961 to 1975.”

The force of this Law was extended up to the 31.3.1976 by the Temporary Legislation (Extension of Force) Law, 1975 (Law 67/75). Consequently, there was legal authorisation for levying contribution up to this date.

It is common ground that the decision not to allow the losses sustained in previous quarters to be transferred and set off against the income of the quarter ended 31.3.1976 was taken under sub-para. (c) ofpara 2 of the Schedule to Law 55/74, as amended, which reads as follows:-

“2. Subject to the provisions of paragraph 3, in ascertaining the income there shall be allowed all deductions under the Income Tax Laws 1961 to 1973, with the exception of the following:

(a)…

(b)…

It is the contention of counsel for the applicant company that the expression “loss carried forward from previous years” refers to losses which a person is entitled to carry forward as at 31.12.73, whether they are losses incurred in 1973 or balances of losses of previous years, under section 15 of the Income Tax Laws, 1961-1976, and in any event that the applicants in this case did not seek to transfer and carry forward losses from “a previous year” but losses from a previous quarter or quarters, i.e. from a quarter in respect of which the applicants were liable to special contribution under Law 55 of 1974, as amended, and nothing in the said Law prevents such a transfer.

As it is obvious from the clear and unambiguous wording of paragraph 2 of the Schedule to the Law hereinabove set out the only deductions that can be allowed when ascertaining the income of a person in a particular quarter, for the purposes of the special contributions levied by this Law, are those which are allowable under the Income Tax Laws, with three exceptions out of which one is “the losses carried forward from previous years” which, though an allowable deduction under section 15 of the Income Tax Laws, yet, it is expressly excluded by the Special Contribution (Temporary Provisions) Law, 1974 which treats the quarter for the purposes of this type of taxation as an entity in itself and tax is levied on the income of each quarter by ascertaining it without authorising the previous losses to be carried forward and made an allowable deduction from the income of a subsequent quarter.

Consequently, the respondent’s decision to disallow the losses of the applicant company in respect of the years 1974-1975 in computing its income for the quarter 1.1.1976-3 1.3.1976 for the purposes of special contribution under Law 55/74, is a correct one.

The same approach governs also the decision of the respondent taken again under sub-para. (c) ofpara. 2 of the Schedule to the Law, with regard to the contribution to be levied on the income for the quarter ended 30.6.1976. There is, however, one more point to be examined in respect of this quarter, as the legal foundation for levying contributions for this period, is to be found in the Special Contribution (Temporary Provisions) Law, 1976, (Law 15/76) which codified, amended and extended the provisions of the previous Laws. This Law came[*81]into force as from the 1st April, 1976 and according to section 12 thereof, it would so remain, so long as the abnormal situation existed and in any event, not after the 31st March, 1977 when it would expire. In this new enactment, sub-para. (c) ofpara. 2 of the Schedule was amended by the addition thereto of a proviso which reads as follows:

“Νοείται ότι το ποσόν ζημίας τριμηνίας τινός μεταφέρεται και συμψηφίζεται μετά του εισοδήματος των επομένων τριμηνιών.”

(“Provided that the amount of the loss of one quarter may be carried forward and be set off with the income of subsequent quarters”).

It has to be pointed out, however, that this amendment came into force on the 1st April, 1976 and the applicant company had no losses during the quarters ended on 31.3.1976 an4 30.6.1976. The amendment of the Law does not add anything to the Law as it pre-existed, except that it qualifies sub-para. (c) ofpara. 2 of the Schedule and affects situations after the 1st April, 1976, there being nothing to suggest that any retrospective effect should be given to it.

It remains now to consider whether the relevant provisions of the said Laws are unconstitutional in that they infringe paras. 1 and 4 of Article 24 of the Constitution which read as follows:

“24.1. Every person is bound to contribute according to his means towards the public burdens.

2…

3…

4. No tax, duty or rate of any kind whatsoever other than customs duties shall be of a destructive or prohibitive nature.”

Although the “relevant provisions” of the said Laws claimed to be unconstitutional are not identified: by their numbers, yet, I take it that this ground of unconstitutionality refers to the sections relied upon by the respondents in levying the taxation and which are set out in the opposition and in particular, sections 3 and 6 of the 1974 and 1976 Laws, as well as para. 2 of the Schedule to the first Law[*82]

I avail myself, however, of this opportunity to stress the need that litigants should refer specifically to the particular statutory provision or provisions which they claim to be unconstitutional.

The arguments advanced on behalf of the applicant company on this issue, were that the contribution imposed was not according to one’s means, as required by para. I of Article 24 of the Constitution, as, “in order to determine the ‘means’ of a person it is not possible to separate the losses of one quarter from the profits of the next quarter but the latter should be set off against the former, otherwise one cannot speak of contribution ‘according to the means’ of the contributor”.

With regard to para. 4 of Article 24 of the Constitution, it was urged that the present case “affords a very good practical example why the interpretation given by the respondent to the said Law, renders the relevant special contribution of a destructive” or ‘prohibitive’ nature”.

In the case of The Board for Registration of Architects and Civil Engineers v. ChristodoulosKyriakides (1966) 3 C.L.R. p. 640, the Supreme Court laid down the principles that should guide Courts’ when considering the question of the constitutionality of a statute and the exercise of judicial control of legislative enactments. In doing so, it looked for guidance to cases decided by the Supreme Court of the United States, and although not bound by them, it adopted a number of principles being in agreement with the reasoning behind them and which, in so far as relevant to the present case, are summed up as follows at page 645 of the report:

“(a) A rule of precautionary nature is that no act of legislation will be declared void except in a very clear case, or unless the act is unconstitutional beyond all reasonable doubt. In other words a Law is presumed to be constitutional until proved otherwise beyond reasonable doubt.

(b) Another maxim of constitutional interpretation is that the Courts are concerned only with the constitutionality of legislation and not with its motives, policy or wisdom, or with its concurrence with natural justice, fundamental principles of government or spirit of the Constitution.[*83]

(c) It is a cardinal principle that if at all possible the Courts will construe the statute so as to bring it within the law of the Constitution.

(d) The judicial power does not extend to the determination of abstract questions viz. the Courts will not decide questions of a constitutional nature unless absolutely necessary to a decision of the case.

(e) In cases involving statutes, portions of which are valid and other portions invalid, the Courts will separate the valid from the invalid and throw out only the latter unless such portions are inextricably connected.”

Moreover, in determining the constitutionality of the Law, the social, economic and other conditions which call for suchlegislation cannot be ignored, arid in this instance the Special Contribution (Temporary Provisions) Law of 1974 or any other subsequent enactment substituting same, as well as other related legislation has to be viewed in the light of the tragic events and the disruption of the economy of the Island that resulted there from and the social and economic needs which had to be met by expenditure and for which, revenue had to be raised as a matter of urgency:

Further, as pointed out in Lehnhausen v. Lake Shore Auto Parts Co. 35 L.Ed. 2d 351, referred to with approval also in Anastassiou v. The Republic (1977) 6 J.S.C. p. 971 at p. 1032, “where taxation is concerned and no specific federal right, apart from equal protection, is imperiled, the States have large leeway in making classifications and drawing lines which in their judgment produce reasonable systems of taxation.”

In matters of taxation, the legislature must be allowed great freedom in classification and as stated in Madden v. Commonwealth of Kentucky (84 Law. Ed. 590) at p. 593-cited with approval in Matsis v. The Republic (1969) .3 C.L.R. 245 at p. 262, “… the passage of time has only served to underscore the wisdom of that recognition of the large area of discretion which is needed by a legislature in formulating sound tax policies…”[*84]

Also, in the case of HjiKyriacos& Sons Ltd., 5 R.S.C.C. 22, para. 1 of Article 24 was considered and, inter alia, it was stated at page 29, “… income as a basis for taxation on a large scale is a sufficiently reasonable and equitable criterion so as to ensure that the principle of equality is not infringed”.

In my view, the fact that a tax is levied on the income of a person in respect of a particular period without allowing the deduction of the losses of a previous quarter or quarters, does not violate in any way para. 1 of Article 24 of the Constitutionin the sense that one is not asked to contribute only according to his means. The legislator had, apparently, thought it necessary, in the circumstances, to treat the quarter as an entity and tax income earned during such period, independently of previous losses as necessary for the purpose of securing indispensable revenue. I find, therefore, nothing unconstitutional in this.

With regard to the claim that the contribution imposed is of a destructive or prohibitive nature, contrary to para. 4 of Article 24 of the Constitution, we need only look at the rates of contribution, as set out in the Schedule to the Law where there is a tax free allowance of the first £120.- of the income of a quarter and then there is a progressive escalation of tax, starting from 100 mils and going up to 250 mils, the latter being only payable in respect of income during a particular quarter which is in excess of £1,000.-

Considering, therefore, the totality of the circumstances of the present case, it cannot be said that the mere fact that certain deductions were not made allowable in ascertaining the income of a tax payer for a particular quarter, makes out a clear case that the relevant Law is unconstitutional beyond all reasonable doubt.

Therefore, the relevant provisions do riot, in my opinion, violate either para. 1 or para.4 of Article 24 of the Constitution.

For all the above reasons the present recourse is dismissed, but in the circumstances I make no order as to costs.

Application dismissed.

No order as to costs.

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