1938 (3) TMI 16 - HC - Income Tax

Summary

Issues Involved:
1. Assessability of the respondent bank to income tax on profits from the London branch.
2. Exclusion of specific interest items from the income tax assessment.
3. Applicability of statutory exemptions to the interest items.
4. Reduction of the amount of excluded credit items by a proportionate part of the debit item.

Issue-wise Detailed Analysis:

1. Assessability of the Respondent Bank to Income Tax on Profits from the London Branch:
The respondent bank, residing in New Zealand and not ordinarily resident in the United Kingdom, operates a branch in London. The bank is assessable to income tax under the Income Tax Act, 1918, Case I, Schedule D, on the profits arising from the trade exercised at the London branch. The assessment in question pertains to the sum of lb94,448 for the year ending April 5, 1929, made by the additional commissioners of income tax for the city of London.

2. Exclusion of Specific Interest Items from the Income Tax Assessment:
The respondent bank appealed against the assessment, seeking to exclude four credit items based on statutory exemptions:
- Interest on War Loan 5 per cent: lb75,621
- Interest on India 3 per cent: lb1,500
- Interest on Grand Trunk Pacific Railway: lb412
- Interest on Auckland Electric Power Board: lb1,023
The total amount sought to be excluded was lb78,556.

3. Applicability of Statutory Exemptions to the Interest Items:
The statutory provisions cited for the exclusions were:
- War Loan Interest: Income Tax Act, 1918, Section 46(1) exempts interest on securities beneficially owned by persons not ordinarily resident in the UK.
- India Government Stock: Schedule C, General Rules, r. 2(d) exempts interest on securities of a foreign state or British possession payable in the UK, owned by persons not resident in the UK.
- Grand Trunk Pacific and Auckland Electric Power Stocks: Schedule D, Misc. Rules, r. 7(2) incorporates provisions of Schedule C relating to tax on dividends payable out of public revenue other than that of the UK.

The Crown contended that these provisions merely exempted interest from charge under Schedule C or Schedule D, Case III, and did not exclude trading receipts from the computation of profits under Schedule D, Case I. The court rejected this contention, affirming that the exemptions applied whether the interest was considered as such or as part of the trade profits.

4. Reduction of the Amount of Excluded Credit Items by a Proportionate Part of the Debit Item:
The Crown argued that if the interest items were excluded, the proportion of the debit item (lb112,868) attributable to the cost of obtaining the money used in earning the excluded items should also be excluded, amounting to lb41,262. The special commissioners and lower courts rejected this argument, stating that the expense connected with the investments was wholly and exclusively laid out for the purposes of the trade, and thus deductible under Schedule D, Cases I and II, Rule 3.

Conclusion:
The court affirmed the decision of the Court of Appeal, rejecting the Crown's contentions and upholding the exclusions of the interest items without reducing the amount by the proportionate part of the debit item. The appeal was dismissed with costs.