| 8/2/2012 |
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| Court of Appeal - Decisions in Income Tax Cases |
| Case No: 38 |
Decided on 13 June 1961 |
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Tax On Arrears Of Interest Payments. Whether Part Of The Interest Payable On Bonds Bought At A High Price Because Of Payment Of Arrears Interest Constituted Repayment Of Capital
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Certain Japanese bonds did not pay interest during war time and in the immediate post war years. Following arrangements made by the Japanese Government, these bonds were re-cycled and for ten years interest was paid for the current year and for the year ten years before. It was claimed that since most of the arrear years were pre-income tax years, and since the Bonds were purchased at a high price precisely because of the payment of double interest, no tax should be paid on the arrears portion.
Both the Board and the Court held that interest was taxable when paid. Following precedents established in the U.K. courts, it was held that receivability (i.e. during the arrears years) without receipt is nothing. Income accruing was not taxable until received, except in trade matters where the rules of accountancy were based on the accruals principle. "A debt which has been long delayed has been all along receivable, but the receivability which is touched upon here is the receivability upon which there has been a receipt".
The tribunals refused to accept the argument that once the taxpayer had bought the bonds at a high price precisely because of the double payment of interest which he would be receiving for several years, he was actually receiving back his own capital outlay. The two things were entirely separate and any asset which yielded a high return of income was bound to have a high capital value. This could not mean that the income was partly capital. So also, when shares are bought with the right to receive a forthcoming dividend, the dividend forms part of the purchaser's income, not of the vendor's; the increase in price of such shares cannot be set off against the dividend.
BSC Case No: 37/59
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