(1988) 3 CLR 1349
[*1349] 1988 June 30
[SAVVIDES, J.]
IN THE MATtER OF ARTICLE 146 OF THE CONSTItutiON
CHRISTIS PHYLACtOU,
Applicant,
v.
THE REPUBLIC OF CYPRUS, THROUGH
1. THE MINISTER OF FINANCE,
2. THE COMMISSIONER OF INCOME TAX,
Respondents.
(Case No. 640/84).
Taxation-Capital GainsTax-The Capital Gains Tax Law, 1980 (Law 52/80)-Expenditure incurred after 27.6.78 wholly and exclusively incurred inrelation to the acquisition of the gain-Legacy of immovable property oncondition that legatee pays £25,000 bequests to various persons and the estate duty-Sale of legatee, who had paid such sums, of the said property-Whether in computing the "gain" liable to the tax such payments are deductible-Question determined in the negative.
Constitutional Law-Equality-Constitution,Art.28-Safeguards against arbitrary discrimination between persons in similar circumstances.
In this case the issues were:
(a) Whether the seller of immovable property, who had acquired it by abequest in a will on condition that he should pay various money bequests aswell as the estate duty, was entitled, in computing the gain to be taxed underthe aforesaid law, to deduct such payments as expenditure incurred in theacquisition of the gain and, if no, whether the principle of equality is violatedbecause of discrimination between the applicant and persons, who acquire immovable property by a bequest unconditionally.
In dismissing the recourse the Court held that:
(a) Such payments are not deductible.Only express words in the Statute could justify a different conclusion. Such payments could not be considered as made "wholly and exclusively" in the acquisition of the gain.
(b) The applicant and a person, who receives an unconditional bequest property, are not persons in similar circumstances and, therefore, the conclusion under (a) here in above does not violate Art. 28 of theConstitution.
Recourse dismissed.
No order as to costs.
Cases referred to:
Republic v. Arakian (1972) 3 C.L.R. 294;
Kalisperas and Another v. The Republic (1973) 3 C.L.R. 109.
Recourse.
Recourse against the decision of the respondents to impose on applicants the sum of £11,600.= as capital gains tax.
G. Triantafyllides, for the applicant.
Y. Lazarou, for the respondent.
Cur.adv. vult.
SAVVIDES J. read the following judgment. Before delivering judgment I wish to state that the delay in the delivery of the re-served judgment in this case was due to an oversight of the Registry of the Court which misplaced the file of the present case and brought it before me on the 14th June, 1988.
The applicant by the present recourse challenges the validity of the decision of the respondent Commissioner of Income Tax by which an assessment imposing capital gains tax was raised and[*1351] determined as per exhibit 1 attached to the opposition. According to the said exhibit capital gains tax on property inherited by the applicant was assessed at £11,600.- less an amount of £241.70already paid leaving a balance of £11,358.30.-
The facts of the case are as folows:
Applicant, a Cypriot now residing in England, was by the willof his aunt Julia Phylactou who died in January, 1983, bequeathedimmovable property comprising of a plot of land underregistration No. 472 at the corner of Evagoras Avenue and ThemistoclisDervis Street, Nicosia.
The said bequest was subject to the condition that the applicantshould pay:
(a) £25,000.- to the executor of the will who under the termsof the will was bound to pay the said sum in settlement of various bequests mentioned in the will for the benefit of a number of persons who were going to receive the bequests free of any chargefrom estate duty.
(b) Any balance from the amount of £25,000.- after the paymentof the aforesaid bequests was according to the will to formpart of the movable property of the deceased which was bequeathedto a cousin of the applicant, namely, ThrassosPhylactou who was to take such property free of any charge from estate duty.
(c) The estate duty on the whole of the property of the deceased was, after the death of the deceased, assessed at £31,140.-
The said immovable property was sold on the 22nd May, 1984.the Bank of Cyprus (Holdings) Ltd. for the sum of £150,000.-andon the 28th May, 1984, the executor of the estate submitted acapital gains tax return in which he declared that the immovable property bequeathed was sold for £150,000.- and that the capital[*1352] gain made, after deducting from the said sale proceeds its value atthe date of death, was £65,000.-
On the 7th September, 1984, the respondent raised a capitalgains tax assessment on the amount declared by deducting£2,000.- as commissions to estate agents and £5,000.-, the allowed exception, thus leaving a balance of £58,000.- on which a capital gains tax of £ 11,600. - was assessed.
On the 14th September, 1984, applicant through his advocateobjected to the above mentioned assessment claiming that out ofthe proceeds of the sale the amount of £25,000.- which was paidto the executor for the account of the' other legatees and the sumof £31,140.- paid for estate duty should be deducted from thesale proceeds.
Respondent 2 having considered the objection raised on behalfof the applicant decided to reject same for the reasons stated in hisletterdated 12th November, 1984, ,addressed to applicant's counseland which reads as follows:
"Αναφέρομαι στην ένσταση σας με ημερομ. 10.9.1984 και στις επιστολές σας με ημερ. 24.5.84 και 10.9.1984 εκ μέρους του πιο πάνω πελάτη σας και σας πληροφορώ τα πιο κάτω:-
Εχω μελετήσει προσεκτικά τα σημεία της ένστασης σας σύμφωνα με τα οποία απαιτείτε αφαίρεση από το κέρδος των £63,000, ποσό από £31,140 που αντιπροσωπεύει φόρο κληρονομίας και ποσό από £25,000 που πληρώθηκε στον εκτελεστή της διαθήκης κο Νίκο Μ. Φιερό και σας πληροφορώ ότι η απαίτηση σας αυτή δεν μπορεί να γίνει αποδεκτή για τους ακολούθους λόγους-
(α) Οι πιο πάνω πληρωμές δεν θεωρούνται σα δαπάνη που έχει γίνει εξ ολοκλήρου και αποκλειστικά προς κτήση του κέρδους.
[*1353]
(β) Οι πληρωμές αυτές δεν έχουν καμμιά σχέση με την αγοραία αξία του κτήματος κατά την ημέρα της κτήσεως αυτού από τον πελάτη σας ή σε οποιαδήποτε μεταγενέστερη ημερομηνία.
(γ) Οι πληρωμές αυτές αποτελούν μέρος του κόστους κτήσεως από τον πελάτη σας της ακίνητης ιδιοκτησίας. Ο πελάτης σας επλήρωσε £56,140 (31,140 + 25,000) και απέκτησε την ακίνητη αυτή ιδιοκτησία της οποίας η αξία εξετιμήθη στο ποσό των £85,000.
Σας εσωκλείω ειδοποίηση επιβολής φορολογίας κεφαλαιουχικών κερδών και παρακαλώ να προσέξετε ιδιαίτερα την παράγραφο 7 στην οποία σας δίνεται το δικαίωμα προσφυγής στο Ανώτατο Δικαστήριο της Δημοκρατίας μέσα σε 75 μέρες από την ημερομηνία της ειδοποίησης αυτής αν θεωρείτε τον εαυτό σας αδικημένο από την πιο πάνω απόφαση μου."
The English translation reads as follows:
("I refer to your objection dated 10.9.1984 and your lettersdated 24.5.84 and 10.9.1984 on behalf of your aforementionedclient and inform you as follows:
I have considered carefully the points of your objection accordingto which you claim deduction from the gain of£63,000, of a sum of£31,140 which represents estate dutyand a sum of £25,000 which has been paid to the executor ofthe will Mr.Nicos M. Fieros and inform you that your saidclaim cannot be accepted for the following reasons-
(a) The above payments are not considered as an expensewhich has been wholly and exclusively incurred for the acquisition of the gain.
(b) The said payments have no relation with the purchasevalue of the property on the date of its acquisition by your client or on any subsequent date.
(c) These payments form part of the cost of acquisition by[*1354] your client of the immovable property. Your client has paid £56,140 (31,140 + 25,000) and acquired the said immovable property whose value was assessed at £85,000.
I enclose a notice of assessment of capital gains tax andplease note especially paragraph 7 under which you have theright of recourse to the Supreme Court of the Republic within 75 days from the date of this notice if you consider yourselfdispleased from my above decision.”)
As a result applicant filed the present recourse challenging theabove decision.
The sole question which poses for consideration in the presentcase is whether the sums of(a).£31,140.- paid by applicant insettlement of the estate duty and (b) £25,000.- paid by applicant tothe executor of the will of the deceased should have been deductedby the respondents, out of the gain realized.
Counsel for applicant submitted that the present case does notconcern a sale of property but an acquisition of property on accountof death and under the provisions of the law acquisition ofproperty on account of death is not sale. Furthermore he contendedthat the above two amounts must be considered as an expenditure which was made for the purpose of acquiring the propertyand as such it must be added to the amount of £85,000.- which was the market value of the property at the time of death and be deducted from the proceeds of the sale. He made extensive reference to the provisions of the law and concluded that bearing in mind the definition of the word "property" in s.2 of the law in order to arrive at the proper figure one must deduct the amountwhich was paid as a condition for acquiring the property.
Counsel further argued that the decision of the respondentsleads to a discrimination against the applicant contrary to Article28 of the Constitution if a comparison is made between the case of the applicant who received the property subject to payment of a sum of money and the estate duty on the whole estate and the case[*1355] of a taxpayer who received property by virtue of a will withouthaving to pay the amounts paid in the present case.
If such taxpayer, counsel added,sells the property left to himby the will of the deceased he will get as a profit the whole difference between the market value at the time of death and the saleprice whereas the applicant has not actually received such a profitbecause he has paid out of his own pocket the amounts mentionedabove as a condition for acquiring the property.
Counsel for the respondents, on the other hand, submitted thatthe sub judice decision is correct and that there is no provision inthe law enabling the deduction claimed. Under the provisions ofthe law, he submitted, the gain accrued to an individual from thedisposition of property .is computed by comparing the disposal consideration with the cost of acquisition, that is, the market valueof the property as at 27th June, 1978, or as at the date of thedeath in the case of a transfer in contemplation of death, accruingafter 27th June, 1978, and any expenditure wholly and exclusivelyincurred after such date in acquiring the gain.
In dealing with the alleged violation of Article 28 he submittedthat the principle of equality, safeguarded by Article 28, is tosafeguard against arbitrary discrimination between persons insimilar circumstances and that the example of the two cases givenby counsel for applicant in support of his argument cannot beconsidered as amounting to an example of persons in similar circumstances.The position of the applicant, counsel submitted,who received the property subject to payment of certain bequests and estate duty on the whole property cannot be assimilated tothat of a person who is bequeathed property free from the conditionsattached in the applicant's case.
The assessment of capital gains was introduced in Cyprus bythe Capital Gains Tax Law, Law 52 of 1980 which under s.4provides that"gains tax is imposed on any gain realized by dispositionof property at the rate of 20% on such gain". The exemptionsto the tax are provided by s.5 and the calculation of profit is[*1356] covered by s.6 which provides as follows:
"6.- (1) Κατά τον υπολογισμόν του κέρδους -
(α) Οιαδήποτε πρό της 27.6.1978, ή κατ' επιλογήν του ιδιοκτήτου πρό της 14.7.1974, αύξησις της αξίας της ιδιοκτησίας δέν θα λαμβάνηται υπ' όψιν:
Νοείται ότι αναφορικούς πρός ιδιοκτησίαν ευρισκομένην εντός απροσπελάστου, λόγω της Τουρκικής εισβολής, περιοχής ουδεμία αύξησις της αξίας της ιδιοκτησίας θα λαμβάνηται υπ' όψιν
(β) Θά εκπίπτηται οιαδήποτε δαπάνη εξ ολοκλήρου και αποκλειστικώς γενομένη πρός κτήσιν του κέρδους μετά την 27.6.1978 καί η οποία δέν εκπίπτεται δυνάμει των εκάστοτε εν ισχύι περί Φορολογίας του Εισοδήματος Νόμων."
The translation in English reads as follows:
("In computing the gains -
(a) any appreciation of the value of the property before the27.6.1978 or, if the owner so elects, before the 14.7.1974,shall not be taken into account.
Provided that no appreciation in the value of the property shall be taken into account in respect of property situated within an area that became inaccessible by reason of the Turkish invasion;
(b) allowance shall be made for any expenditure wholly and exclusively incurred after the 27.6.1978 in relation to the acquisition of such gains, which is not an allowable deductionunder the Income Tax Laws in force for the time being)".
I have carefully considered the arguments advanced by counsel[*1357] on both sides and the relevant provisions of the law but I couldnot trace anything in the law allowing the exemption from thegains realized by the sale of immovable property of any bequestsof a deceased by virtue of a will, or of any amount payable as estateduty. In the present case the bequest of the immovable propertyof the deceased to the applicant was not an unconditional onebut it was subject to bequests to other persons as well. The otherbequests amounting to £25,000.- were made free of payment ofany estate duty which was under the terms of the will the absoluteliability of the applicant. I find myself unable to accept the submissionof counsel for applicant that the amounts paid should bededucted from the capital gain realized as expenditure wholly andexclusively incurred for the purpose of acquiring the property. Ifsuch contention is accepted it inevitably leads to a situation where the acquisition by will of property of extensive value and subjectto payment of considerable capital gains tax should not be subjectto the payment of tax or subject to payment of considerably reduced tax if it is bequeathed subject to payment of legacies which may considerably reduce or exhaust capital gains. If such serioussituation was intended then express provision should have beenincluded in the law to that effect alongside with the other exemptionsprovided therein.
The same applies to the claim for deduction from the profits ofthe amount of the estate duty paid. There is no provision in thelaw that such amount is deductible.
Under sections 6 and 10 of the Capital Gains Tax Law, 1980the method of assessing capital gains is expressly set out therein.According to such provisions the gain accruing to an individualfrom a disposal of property is computed by comparing the cost ofacquisition i.e. the market value of the property as at 27th June, 1978 or as at the date of the death in case of a transfer in contemplationof death accruing after the 27th June, 1978 and the marketvalue of the property at the time of its disposition. The differencebetween the two is the chargeable gain. From such calculation theonly amounts which can be deducted are expenses wholly and exclusivelyincurred after the 27th June, 1978 in acquiring the gain.[*1358]It is for this reason that the respondents deducted an amount of£2,000.- as estate agents fees for realizing the sale of the property though there is no claim by theexecutor for such deduction. I find that, in the circumstances of the present case and bearing in mind the provisions of the law,itwas reasonably open to the respondent to reach the conclusion that the deductions claimed bythe applicant were not expenditureWholly and exclusively incurred acquiring the gain.
I come next to consider whether Article 28 has been violated. It is well settled that the principle of equality is to safeguard against arbitrary discrimination between persons in similar circumstances (The Republic v. Arakian(1972) 3 C.L.R. 294; Kalisperasand Another v: The Republic (1973) 3C.L.R. 109). Theexample on which counsel for applicant sought to base his argument, thatis a comparison between a person to whom propertyis bequeathed subject to certain conditions and a person to whomproperty has been bequeathed unconditionally isnot persuasive asthe two examples do not represent similar situations, which maylead to violation of Article 28. In my view Article .28 does notcome into pay in the present case.
For all the above reasons I have come to the conclusion thatthe recourse is bound to fail and is hereby dismissed but in thecircumstances I make no order for costs
Recourse dismissed.
No order as to costs.
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