1945 (6) TMI 1 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of lb10,028 awarded as interest is "interest" on which tax is chargeable under Schedule D.
2. Whether the bank was bound or entitled to deduct tax from the interest sum at the time of payment.

Detailed Analysis:

1. Taxability of the Awarded Interest:
The primary issue is whether the lb10,028 awarded as interest falls under "interest" chargeable under Schedule D of the Income Tax Act. The court reasoned that when the legislature authorizes the court to award interest, it is reasonable to assume that such interest is intended to be taxed as "interest of money." The court found no indication that the term "interest" in the Law Reform (Miscellaneous Provisions) Act, 1934, should be interpreted differently from its usage in the Income Tax Act. The court emphasized that the awarded interest compensates for the delayed payment of a debt and should be treated as taxable interest under Schedule D. The court also noted that the non-recurrent nature of the interest does not exclude it from being taxable.

2. Obligation to Deduct Tax from Judgment Debt:
The second issue concerns whether the bank was obligated to deduct tax from the interest included in the judgment debt. The court acknowledged the complexity of this issue, given that the interest merges into the judgment debt. However, it concluded that the law intended for tax to be deducted from such payments to ensure the Crown's interests are protected. The court reasoned that although the interest merges into the judgment debt, it retains its character as interest for tax purposes. Thus, the bank was required to deduct tax from the interest portion of the judgment debt.

Supporting Arguments and Precedents:
The court considered various authorities and precedents. It distinguished the present case from cases like Simpson v. Maurices Executors, where the awarded sum was not considered interest for tax purposes because it was calculated as damages. In contrast, the interest awarded to Mr. Riches was clearly intended as compensation for delayed payment, aligning it more closely with cases like Schulze v. Bensted, where interest awarded for delayed payments was deemed taxable.

Conclusion:
The court concluded that the lb10,028 awarded as interest is subject to tax under Schedule D, and the bank was obligated to deduct tax from this sum at the time of payment. The appeal was dismissed with costs, and leave was granted to appeal to the House of Lords.

Separate Judgments:
- Morton, L.J.: Agreed with the primary judgment, emphasizing that the sum awarded as interest falls within the definition of "interest of money" under Schedule D. He noted that excluding such sums from taxation would lead to anomalous results.
- Cohen, J.: Also concurred, stressing that the interest awarded under Section 3 of the 1934 Act should be deemed to have accrued over the specified period, making it taxable. He rejected the argument that the interest sum was in the nature of damages, aligning with the principle established in Schulze v. Bensted.

Final Decision:
The appeal was dismissed, affirming that the awarded interest is taxable and the bank was correct in deducting tax. Leave to appeal to the House of Lords was granted.