| 6/1/2009 |
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| Board of Special Commissioners - Cases |
| Case No. 37/59 |
Decided: 20 July, 1960 |
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Tax on arrears of interest payments; Interests paid in arrears cannot be considered as "capital repayment" even though the relatively high price paid for the bonds made provision for such outstanding interests - article 5, now article 4, Income Tax Act
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During the war and the immediate post-war years no interest was paid on Japanese bonds. In 1952 the Japanese Government set up a scheme whereby the bonds were re-cycled and for ten years interests were paid both in respect of the current year and one of preceding ones. Taxpayer argued that since most of the arrear years preceded the promulgation of the Income Tax Act, and once a relatively high purchase price had been paid in the light of outstanding interests, no tax should be charged on the arrears portion.
Quoting extensively from UK case law and authors on the subject, the Board held that receivability without receipt is nothing. Income accruing was not taxable until received except in trade matters where the rules of accountancy were based on the accruals principles. In the case Leigh vs Comm. of Inland Revenue (May 1927) it had been expressly stated that "A debt that has been long delayed has been all along receivable but the receivability which is touched upon is the receivability under which there has been a receipt."
Furthermore the Board refuted taxpayer's claim that once the interest payable formed an integral part of the purchase price, he was actually receiving back his own capital outlay. It was logical that any asset which yielded a high return of income had a high capital value and, therefore, this could be construed to mean that the income was partly of a capital nature. Quoting again from Konstam "when shares are bought with the right to receive a forthcoming dividend, the dividend forms part of the purchaser's income, not of the vendor's; the increase in the price cannot be set off against the dividend."
An appeal was entered before the Court from this decision (see case no. 38).
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