1938 (2) TMI 9 - HC - Income Tax

Summary

Issues Involved:
1. True construction and effect of the Finance Act, 1920, Section 27.
2. Determination of United Kingdom comparative income.
3. Deduction of debenture interest in the computation of assessable income.
4. Agency argument related to the payment of income-tax on debenture interest.

Issue-wise Detailed Analysis:

1. True Construction and Effect of the Finance Act, 1920, Section 27:
The appeals raised questions on the true construction and effect of Section 27 of the Finance Act, 1920. The section provides relief from United Kingdom income-tax if the taxpayer proves they have paid Dominion income-tax on the same part of their income for the same year. The section aims to alleviate double taxation by allowing relief from United Kingdom income-tax at a rate determined by the Dominion rate of tax. The relief is given based on the smaller of the two comparative incomes (United Kingdom and Dominion).

2. Determination of United Kingdom Comparative Income:
The company's profits for the year 1928-29 were assessed at lb70,017. However, certain items amounting to lb25,549, which were not taxed in New Zealand, were deducted, leaving lb44,468 as the United Kingdom comparative income. The Crown contended that an additional sum of lb9,998, representing a special exemption under Section 83 of the New Zealand Act, should also be deducted, reducing the United Kingdom comparative income to lb34,470. The court held that this special exemption should not be deducted, maintaining the United Kingdom comparative income at lb44,468.

3. Deduction of Debenture Interest in the Computation of Assessable Income:
The company's assessable income in New Zealand was lb26,592 after deducting debenture interest of lb33,609. The Crown argued that this debenture interest should not be considered part of the company's income for relief purposes. The court, however, held that the debenture interest, though deducted in New Zealand, was part of the company's revenue and should be included in the New Zealand comparative income. Thus, the New Zealand comparative income was determined to be lb60,201 (lb26,592 + lb33,609).

4. Agency Argument Related to the Payment of Income-Tax on Debenture Interest:
The Crown argued that the company was taxed as an agent for the debenture holders and not on its own income. The court rejected this argument, stating that the company paid the tax and bore the ultimate burden, making it eligible for relief. The court emphasized that the actual payment of tax, not the ultimate incidence, is the criterion for relief under Section 27. The court concluded that the company paid Dominion income-tax on the debenture interest as part of its income, thus qualifying for relief.

Conclusion:
The appeals were dismissed, and the principles established by the Court of Appeal were upheld. The United Kingdom comparative income was determined to be lb44,468, and the New Zealand comparative income was lb60,201. Relief under Section 27 was granted based on the smaller United Kingdom comparative income. The court also directed that the language of the order be modified to include the judgments of the House of Lords.