| 6/1/2009 |
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| Court of Appeal - Decisions in Income Tax Cases |
| Case No: 24 |
Decided on 20 May 1959 |
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Whether An Annuity Imposed By A Will On A Legatee As A Condition Of His Receiving A Legacy Was Deductible As A Revenue Expense, Or Not Deductible As A Capital Item
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The taxpayer was in equal partnership with his father in a partnership en nom collectif. By unica charta will, the father left his share of the enterprise (which appertained to the community of acquests with his wife) to the son by way of legacy. There were some arrangements regarding bank deposits belonging to the business, but the taxpayer was required to pay his mother a life annuity in return for the arrangements made in the will.
Basing itself on the principles that (1) during its continuance, neither party has any right to half of any particular item in the community: this right only crystallizes itself on the termination of the community, so that the wife could not really ask for a "quid pro quo" in the will itself; (2) at that time the husband was in absolute control of the community, the Board granted the allowance.
The Court of Appeal disagreed. Expenses had to satisfy two tests to be allowable: they must fall within the ambit of the section which grants a deduction, and must not be prohibited under the provisions of the section which specifically denies the deduction of certain items. Among these prohibitions were items of a capital nature. The Court was of the opinion that the annuity payable by the taxpayer constituted "money spent in acquiring a business (which) is no more deductible than other kinds of capital expenditure". Moreover, the Court pointed out that a purchase price need not be paid in one lump sum, but could be spread out over the years. The requirement to pay the annuity was clearly tied to the acquisition of the legacy by the taxpayer: something which he could refuse to do. Clearly, once he accepted the legacy he had to pay for it in terms of the will constituting the legacy. When agreeing to this arrangement, the mother, who in terms of the statute of the partnership had the right to continue in the partnership after her husband's death, was clearly receiving compensation for agreeing to forgo her share of the partnership.
The payment imposed on the legatee was in no way linked with the production of his income from the partnership: in fact the payment had to be effected irrespective of the partnership's profits. The payments were made out of the profits which the taxpayer had earned. They were made out of income that had already come into existence. The Court introduced into Malta for the first time a long established tax principle that the application of profits which were already in existence could not affect the amount of the profits which were liable to tax.
BSC Case No: 30/58
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