| 21/8/2008 |
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| Court of Appeal - Decisions in Income Tax Cases |
| Case No: 34 |
Decided on 6 February 1962 |
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Deductibility Of Interest That Was Due But Not Paid And Which There Was No Chance Of Its Ever Being Actually Paid
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The taxpayer, a widow, had inherited from her husband (as part of her community of acquests and as his usufructuary) a large liability on which interest in as big a sum was also due. The creditor had given up all hope of receiving his money, and had entered into an arrangement whereby he accepted in full settlement an amount of approximately 10% of his dues. He had also informed the Revenue that he had renounced his right to the interest due.
The taxpayer claimed a deduction of the interest that was due since the law stated that a deduction was due on "...sums payable by way of interest upon any money borrowed by him where the Commission is satisfied that the interest was payable on capital employed in acquiring the income." She also stated that she had never accepted the creditor's renunciation to the interest. The claim was rejected by both the Board and Court. It is true that it would normally be sufficient that interest be due for deductibility to arise, even if payment had not yet been made. But if subsequent facts indicate that the interest is never going to be paid, no deduction could reasonably be claimed. The transaction whereby the creditor had received in full and final settlement an account equivalent to 10% of the total liability showed that, in reality, no interest was ever going to be paid. The creditor had also, as was his right at law, set off the amount received against the capital due to him and not the interest.
The Court rejected an argument to the effect that subsequent events could not be taken into account as they introduced an element of retroactivity. The Court could not see any such element since the claim for a deduction had been refused by the Revenue immediately in original assessments raised. There was no question of claw-back by way of additional or revised assessments. The Court also stated that whatever sums had been paid by the taxpayer in the deed of compromise was an application of income that had already arisen. The Court also re-iterated the principle laid down in case no 31 that there had to be income from the source which the expense claimed as a deduction had helped to produce before the expense could be deductible.
BSC Case No: 38/58
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