| 6/1/2009 |
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| Board of Special Commissioners - Cases |
| Case No. 41/59 |
Decided: 29 January, 1960 |
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A taxpayer may enter into a contract with a view to avoiding tax - Interpretation of article 21, now 51, Income Tax Act
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Taxpayer entered into a contract with his children whereby a debt was substituted by an annuity. When they realised that the amount payable by them was not being deducted from their taxable income, being considered of a capital nature, while that received by their father was chargeable to tax, they rescinded the contract and entered into a new one, again constituting a debt payable over a period of ten years and carrying no interest.
Revenue argued that such action was meant to avoid tax and, therefore, was in breach of the dispositions of article 21(1) - now article 51(1) - which then read: "Where the Commissioner is of the opinion that any transaction which reduces or would reduce the amount of tax payable by any person is artificial or fictitious or that any disposition is not in fact given effect to he may disregard any such transaction or disposition and the persons concerned shall be assessable accordingly."
The Board disagreed with Revenue's reasoning. In the first instance there was no doubt whatsoever that the rescission of the annuity was made through a valid contract which cannot, in any way, be considered to be fictitious. Indeed the debt was eventually settled. The word "not in fact given effect to" is also not applicable because the obligation of the payment of the annuity no longer existed, having been rescinded by contract. In terms of the Civil Code any two parties to a contract can rescind any obligation so long as they both expressly agree to do so.
An appeal was entered before the Court from this decision (see case no. 35).
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