| 6/1/2009 |
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| Board of Special Commissioners - Cases |
| Case No. 25/71 |
Decided: 10 July, 1972 |
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The transfer of part of the capital to a new partner is considered to be a monetary loan and interests paid thereon are deductible - articles 10 and 11, now 14 and 15, Income Tax Act
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Appellant objected to the Commissioner's refusal to consider as an admissible deduction interest paid on that part of the capital of a partnership en nom collectif which had been transferred to his name. The transaction had been made so as to enable appellant to become a partner. Each of the partners reduced his holding in the partnership proportionately and the proceeds were credited to appellant's new capital account. He had bound himself to pay them interest at the rate of 5% on the amount so loaned.
The Commissioner had based his decision mainly on the assumption that "This transaction did not actually involve the borrowing of money as stipulated by section 10(1)(a) but it only meant that the taxpayer borrowed a part of the capital of the firm which consisted of stock, debtors, cash, vehicles, etc.,"
The Board dismissed the Commissioner's reasoning. Article 1938 (now 1842) of the Civil Code provided that "Mutuum or loan for consumption is a contract whereby one of the parties delivers to the other a certain quantity of things which are consumed by use subject to the obligation of the borrower to return to the lender as much of the same kind and quality." Had the loan consisted of assets, as argued by the Commissioner, appellant would have had to return them in kind. Appellant had been loaned money by his brothers and he was, therefore, obliged to effect repayment by way of monetary instruments. The Income Tax Act made specific reference to "money borrowed" but does not condition the method of repayment. Once no explicit provision is made at law one cannot interpret it in a way as to render it restrictive. The Board also dismissed the Commissioner's argument that "the taxpayer borrowed part of the capital of the firm." The capital had been borrowed from his brothers and the arrangements they made to procure it did not change the nature of the contract of loan.
The interest was due to appellant's brothers and not to the firm. The loan was acquired to obtain a share of the business and make a profit thereon. The interest paid was, in the circumstances, an expense incurred "in the production of the income" and its deduction allowed.
An appeal was entered before the Court from this decision (see case no. 91).
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