| 21/8/2008 |
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| Court of Appeal - Decisions in Income Tax Cases |
| Case No: 51 |
Decided on 23 September 1963 |
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Whether A Transaction Is Fictitious Or Artificial Is A Point Of Fact. Aggregation To Parents' Income Of Income Accruing To Children In Consequence Of Gratuitous Dispositions. Agreed Rates Of Interest On A Loan May Over-Ride For Tax Purposes Certain Provisions Of The Civil Law Relating To The Gratuitous Nature Of Loans. Extraneous Factors Are Not To Be Taken Into Account In Applying The Relative Provisions Of The Act.
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This case concerned two loans made by a father to his children at low rates of interest, which were then re-lent by the children to a third party at a higher rate. At the same time, the father loaned further money to the third party. There were a few months' difference between the dates on which the loans were made to the children. The Revenue assessed the father on the full interest which the third party was paying to the children on both loans.
The Board held that the provisions of the I.T.A. relative to gratuitous dispositions made to children (whereby the resulting income is to be aggregated with the parent's income) could not apply in the case of one loan. On the other hand, the provisions of the Act whereby artificial or fictitious transactions were to be discarded applied in the case of the other because of the circumstances in which this loan was made. Cross appeals were made to the Court of Appeal.
The Board had held that there could be no gratuitous aspects when a low rate of interest was agreed upon, since Civil Law held that no interest was due unless agreed upon. The Court disagreed saying that while it was true that Civil Law held that loans were gratuitous by their very nature, as soon as a rate of interest was agreed upon, the loans became onerous. In this sense the Board had erred at law, and the Act's provisions regarding the Clawing back to the parent's income were applicable.
As regards the other loan, the Board had held that the circumstances in which this was made were suspicious, and that the anti-avoidance provisions of the Act relative to artificial and fictitious transactions were applicable. The parent was therefore to be taxed on the full amount of the interest payable by the borrower. In so deciding the Board, as entitled to do by the particular provisions of the law concerned, was reviewing the exercise by the Commissioner of Inland Revenue, of the discretionary powers vested in him in this regards. The Court held that the Board's review of the exercise of the Commissioner's discretion determined points of fact, and could not therefore be appealed against. The Board had agreed with the Revenue that the circumstances of the transaction were suspicious and that the provisions relative to artificial or fictitious transactions were applicable. No appeal could therefore be made.
The Court rejected suggestions that the low rate of interest agreed with the children had enabled the father to pay them lower wages in his business where they were employed. The two matters were totally unconnected and could not be mixed up together.
BSC Case No: 21/62
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