1936 (12) TMI 31 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of interest on War Loan securities.
2. Taxability of interest on India Government Stock.
3. Taxability of interest on securities of two Colonial companies.
4. Deductibility of expenses related to exempt income.

Issue-wise Detailed Analysis:

1. Taxability of Interest on War Loan Securities:
The primary issue was whether the interest on War Loan securities, which were issued with a condition that the interest thereon shall not be liable to tax, could be taxed under Case I of Schedule D as part of the trading profits of the Bank of New Zealand. The court held that Section 46 of the Income Tax Act, 1918, provided a clear exemption from all taxation for the interest on such securities, provided they were in the beneficial ownership of persons not ordinarily resident in the UK. This exemption was not limited to any specific Schedule and was intended to be general. The court rejected the Crown's argument that the interest could be taxed as part of trading profits under Case I of Schedule D, emphasizing that the language of Section 46 was unqualified and provided a complete exemption.

2. Taxability of Interest on India Government Stock:
The second issue concerned the taxability of interest on India Government Stock under Schedule C, rule 2(d). The court concluded that this rule provided a complete exemption from all taxation for the interest on such securities, as long as the owner was not resident in the UK. This exemption was not limited to taxation under Schedule C but was a general exemption. The court referenced Section 71 of the Finance (1909-10) Act, 1910, which similarly provided an unlimited exemption for such interest, reinforcing that the exemption in Schedule C, rule 2(d), was intended to be comprehensive.

3. Taxability of Interest on Securities of Two Colonial Companies:
The third issue involved the taxability of interest on securities of two Colonial companies under Rule 7(1) of the Miscellaneous Rules applicable to Schedule D. The court held that Rule 7(1) incorporated the provisions of Schedule C, including the exemptions provided in General Rule 2(d). Therefore, the interest on these securities was also exempt from all taxation, similar to the interest on foreign and Dominion securities. The court emphasized that the language of Rule 7(1) was broad and intended to extend all relevant provisions of Schedule C to the securities in question.

4. Deductibility of Expenses Related to Exempt Income:
The final issue was whether the expenses related to earning the exempt interest income (amounting to lb41,262) should be deductible in computing the taxable profits of the bank's London branch under Case I of Schedule D. The court acknowledged the Crown's argument that allowing the deduction of these expenses would result in a double benefit for the taxpayer. However, the court found no provision in the Income Tax Act that would justify excluding these expenses from the computation of taxable profits. The court noted that Rule 3(a) of the Rules applicable to Cases I and II of Schedule D allowed the deduction of expenses "wholly and exclusively laid out for the purposes of the trade," and there was no basis for apportioning or excluding part of these expenses. Consequently, the court concluded that the expenses should be fully deductible.

Conclusion:
The court dismissed the appeal, upholding the decisions of the Special Commissioners and the lower court. The interest on War Loan securities, India Government Stock, and securities of the two Colonial companies was exempt from all taxation under the relevant provisions of the Income Tax Act, 1918. Additionally, the expenses related to earning the exempt income were fully deductible in computing the taxable profits of the bank's London branch. The appeal was dismissed with costs.