Thwaites v The Commissioner of Income Tax


Revenue Court

Marsh, J.

6 of 1972

The Commissioner of Income Tax

R. Mahfood Q.C. for the appellant.

Mrs. A. Hudson-Phillips for the respondent.

Revenue Law - Income Tax — Appeal — Chargeable Income

Marsh, J.

This is an appeal against a Decision of the respondent dated 19 th April, 1972, in which the chargeable income of the appellant for the Year of Assessment 1966 was fixed at $6,414 and that for the Year of Assessment 1969 was fixed at $7,960.


The facts are not in dispute, and are briefly as follows.


In the year 1960 the appellant purchased on credit from his mother $20,000 worth of shares in a company which was later amalgamated with another company, into a new company, known as Dyoll Insurance Company Limited, and of which the appellant is now Managing Director. The terms governing the purchase required the appellant to pay a certain amount each year, by way of interest on any unpaid purchase money outstanding in respect of the shares, which were pledged as security for the debt. In each of the years of assessment beginning with 1961 and ending with 1969, an amount was paid by the appellant to his mother by way of interest on the unpaid purchase money. In each of those years, except the Years of Assessment 1966 and 1969 (the years now in dispute) the appellant also received an income by way of dividends from the shares and was allowed to treat the interest so paid as a deduction in arriving at his chargeable income, pursuant to Section 8(1)(a) of the Income Tax Law 1954. He had no other shares in any other company.


During the Years of Assessment 1966 and 1969, the appellant, as I have already indicated, received no income from the shares, his total income for those two years consisting solely of emoluments received in respect of his employment as Managing Director of Dyoll Insurance Company Limited. In his tax returns for those two years, however, he nevertheless treated the interest payments as expenses deductible under the aforesaid Section 8(1)(a) having been wholly and exclusively incurred in acquiring his income. The amount for 1966 was $2, 000 and that for 1969 was $1,500.


The appellant's claim to have them so treated was, however rejected by the respondent, on the ground that such payments were not properly allowable under Section 8(i)(a), as the interest had not been paid on any capital employed by him in acquiring his income for the years of assessment 1966 and 1969. The appellant in due course appealed to this Court, and contended before me that he was entitled to the deductions claimed, whether or not any dividends had been received by him from the shares, during the relevant periods.


The question, therefore, which this Appeal raises is whether the appellant is entitled to a deduction under Section 8(1)(a) of the Income Tax Law 1954, in the circumstances outlined above.


Section 8(1), so far as is relevant, provides as follows–

“8 (1) For the purpose of ascertaining the chargeable income of any person, there shall be deducted all disbursements and expenses wholly and exclusively incurred by such person in acquiring the income –

  • (i) where the income arises from emoluments specified in paragraph (c) of section 5 of this Law, during the year of assessment; and

  • (ii) where the income arises from any other source, during such time as is provided for in section 6 of this Law, and such disbursements and expenses may include –

    (a) any sum paid by such person by way of interest upon any money borrowed by him where the Commissioner is satisfied that the interest was paid on capital employed in acquiring the income:

    Provided that –

    • (1) the interest is paid to a person resident in this Island; or

    • (2) the interest is paid to a person resident elsewhere than in this Island, and that either (i) no tax is required to be deducted from the interest or such tax as is required by this Law to be deducted has been deducted from the interest and has been accounted for to the Commissioner; or

    • (ii) there is in the Island some person who can be assessed in respect of the interest, or who is liable to pay the tax chargeable upon the interest.”


Chargeable Income is defined at Section 2 of the Law as follows–

“chargeable income” means the aggregate amount of income of any person from all sources remaining after allowing the appropriate deductions and exemptions under this Law.”


From what has been said so far, it is clear firstly, that a deduction for interest paid, under paragraph (a) supra, is only allowable where it can be shown inter alia, that the same has been – “paid on capital employed in acquiring the income”; and secondly, that on the uncontested facts of this case, the capital to which the interest payments related produced no income during the two accounting relevant to this appeal; a situation which, prime facie, suggests that the appellant's claim for the deduction was correctly refused by the respondent.


Counsel for the appellant, however, put the case this way. He submitted–

  • (1) that the expression “the income” used in paragraph (a) was not intended as a reference to the income acquired from Dividends but was intended as a reference to “the chargeable income”, arising in a particular year;

  • (2) that inherent in the definition of chargeable income set out in Section 2 of the Law, was a concept of aggregation which entitled a taxpayer to aggregate, not only his income from all sources for the year, but his expenditure as well;

  • (3) if therefore, there was some chargeable income arising in a particular year, the taxpayer was entitled to aggregate and deduct all items of expenditure listed in Section 8, which he had incurred for that year, whether or not the same could be related to an asset which had actually produced income in the year. It was sufficient, Counsel submitted, simply to show that the expenditure had been incurred on “an income producing asset”; as, for example, was the case under paragraph (e) of the section, in which it was sufficient to show that the amount claimed had been incurred “for the purposes of a trade or business” carried on by the taxpayer;

  • (4) there was, he said, no compelling reason why the deduction under paragraph (a) should be placed on any different footing from that under paragraph (e), since all deductions under Section 8 were based on the same basic principle relating to the ascertainment of taxable income, which is to be found in such cases as Vallambrosa Rubber Com2any Limited v. Farmer reported at p. 529 of Volume 5 of the Tax Cases;

  • (5) since, therefore, the expenditure had been incurred by the appellant on an “income producing asset” during years of assessment in which he had a chargeable income, it should be allowed in the terms claimed.


I accept that in a case where the source of a taxpayer's income is a trade or business, and there is some income accruing from that source during a year, it would be unlawful to restrict his deductible expenditure merely to what had been expended on those assets alone which had produced an income for the year. That was in one sense, the effect of the decision in the Vallambrosa case, where a company was held to be entitled to deduct expenditure on rubber trees which had not yet matured and had not therefore produced any income in the trade being carried on by the company. It must be remembered, however, that in the Vallambrosa case the source of the company's income was a trade, namely that of producing and selling rubber, and some of the trees had in fact produced an income in respect of that trade during the relevant period. It would seem, therefore, that another way of looking at that case is to say that it establishes that when there is income accruing from a particular source in a year, all revenue expenditure attributable to that source may be allowed as a deduction, even if some of that expenditure relates to assets which did not in fact produce any income in the year.


However, in the instant case, the only source of income accruing to the appellant during the Years of Assessment 1966 and 1969, was his...

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