| 6/1/2009 |
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| Court of Appeal - Decisions in Income Tax Cases |
| Case No: 44 |
Decided 24 March 1962 |
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Capital As Against Income Expenditure. Building Expenses On A Site Leased For A Number Of Years Are Capital In Character. The Form Adopted To Give Effect To A Transaction Will Generally Determine Its Nature At Law
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The taxpayer took a site on lease for sixteen years. Rent payable was fairly low, but there was an obligation to construct buildings thereon which, at the end of the lease, were to remain the property of the landlord. The expenditure on the buildings reached £40,000 which the taxpayer wanted to amortise over the period of the lease.
Both the Board of Special Commissioners and the Court refused the deduction, holding that it was a once and for all capital expenditure incurred for the enduring benefit of the trade. It was true that the rent payable may have been low because of the expenditure the taxpayer was bound to incur, but this could not be taken to convert the expenditure into rent. An asset had been brought into existence for the enduring benefit of the trade: it was true that at the end of the lease the asset was due to be handed to the landlord, but there was no requirement that the income producing asset had to remain perpetually in the taxpayer's ownership. The Court also pointed out that, in this particular case, although the lease was for a determinate period of time, it was known that, under the laws of Malta, a commercial enterprise had the right to go on occupying the property at the end of the original lease.
A side issue dealt with by the Court was that rent payable had to emerge from the contract of lease, and in this particular contract the taxpayer's obligation to construct immovables was limited to £7,000. If the expenditure was to be considered as a substitute for rent, therefore, only £7,000 could have so qualified and not the full £40,000 actually spent. The Court however rejected the entire claim, pointing out, inter alia, that the expenditure had been incurred before the relative income could start to be produced. The Court also pointed out that there surely would have been no argument that the expenditure was capital in character had it been incurred by the landlord: the fact that it had been borne by the lessee could not change its character.
The Court affirmed that in taxation matters one could not argue by analogy. In any case, the Court held that: "It is fundamental law in general, and perhaps more so in fiscal matters, that the form, or more precisely the juridical terms of a transaction determine the effects and consequences of that transaction". In this case, at least, the Court gave importance to the "form" of a transaction in the perennial question as to whether the "form" or the "substance" of a transaction should prevail.
BSC Case No: 20/59
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