[1935] EACA 144

# APPELLATE CIVIL.

### Before SIR JOSEPH SHERIDAN, C. J.

# HASSANALI RAHIMTULLA WALJI, Appellant,

v.

# THE COLLECTOR OF NON-NATIVE POLL TAX, Respondent.

# C. A. No. $8/35$ .

## Non-Native Poll Tax Ordinance—Calculation of gains or profits for year of assessment—Deduction for bad debts.

The question submitted for decision was "whether a moneylender to whom interest has accrued due but which it has been impossible to collect, is entitled to deduct such interest as a bad debt under the Non-Native Poll Tax Ordinance, 1933". It was admitted that a particular debt which the appellant sought to set off in assessing his income for the year of assessment (1932) consisting of arrears of interest due in respect of years prior to 1932, was a good debt on the 1st January, 1932, but became irrecoverable prior to 31st December, 1932, owing to the bankruptcy of the debtor.

*Held* (30-3-35).—That in assessing the annual profits or gains of a<br>money-lender, the taxpayer is not entitled (under the Second<br>Schedule to the Non-Native Poll Tax Ordinance, 1933) to a deduction in respect of a debt found to be bad in the year of assessment which was good at the beginning of that year.

Hogan for appellant dealt with the facts and quoted the following authorities: Konstam on Income Tax (5th Ed.) 115-118. Re Spanish Prospecting Co., Ltd. (1911 1 Ch. 92 at 98); Sun Insurance Office v. Clarke (1912 A. C. 443 at 455); Anderton and Halstead, Ltd. v. Birrell (1932 1 K. B. 271); Reid's Brewery Co. v. Male (1891 2 Q. B. 1 at 7).

Lewey for respondent.—The question is one of taxable in-Broughton Coal Co. v. Kirkpatrick (14 Q. B. 496) Leeds come. Building Society v. Mallan-Daine (1897 2 Q. B. 408).

$Hogan$ replied.—Appellant has been assessed on what he should receive-not on what he in fact received or is likely to receive.

JUDGMENT.—After discussing the facts and the provisions of sections 4 and 6 of the Non-Native Poll Tax Ordinance, 1933, and the Second Schedule to the Ordinance the judgment continued:

Were there no provisions for the deduction of bad debts in the Ordinance I would say that the tax was to be assessed on the moneys received in the year 1932 subject of course to the other

deductions and exemptions set out in the Ordinance. I would say so for the reason that apart from the provision for the deduction of bad debts the words "accruing in, derived from or. received in" may be construed as referring to the moneys actually received by the taxpayer on the authority of $St$ . Lucia Usines and Estates Co. v. St. Lucia (Colonial) Treasurer (1924 A. C. 508) in which Lord Wrenbury in delivering the judgment of the Privy Council at p. 512 says: "The words 'arising or accruing' occur repeatedly in the Ordinance e.g. in section 4 sub-section 1 $(a)$ . (b), (c), (d) and (e), coupled with the words 'and derived from' or 'or derived from'... The respondent contends that the above interest 'accrued' to the Company in the year 1921, because it was payable in that year and none the less because it was not paid in that year. Their Lordships do not agree. The words 'income arising or accruing' are not equivalent to the words 'debts arising or accruing'. To give them that meaning is to ignore the word 'income'. The words mean 'money arising or accruing<br>by way of income'. There must be a coming in to satisfy the word 'income'." Later the judgment continues and the quotation is apt, so far as this case is concerned: "It is said, and truly, that a commercial company in preparing its balance sheet and profit and loss account does not confine itself to its actual receipts, does not prepare a mere cash account but values its book debts and its stock in trade and so on and calculates its profits accordingly. From the practice of commerce and of $\quad \ \ \text{But}$ accountants and from the necessity of the case this is so. this is far from establishing that income arises or accrues from (as above instanced) an investment which fails to pav the interest due." The appearance of the words "received in" in section 4 of the Ordinance seems to me to be for the purpose of including a person who resides in Kenya but derives portion of his income (perhaps the whole of it) from sources outside the Colony; he would be taxed on what finds its way into the Colony according to the decision in *Colguhoun* $v$ . *Brooks* (14 A. C. 493) the headnote to which reads: "A person resident in the United Kingdom and engaged in a trade carried on entirely abroad is liable to income tax in respect of so much only of the profits of that trade as are received in the United Kingdom". But the provision for the deduction of bad debts suggests to me that the Ordinance contemplates the case of a business man, whose profits in a year are not measured by what he actually receives, including in his return of income not only what he actually receives but also what according to his books he is due to receive as a result of his business transactions in the year under consideration. That business men calculate their profits annually in such a manner is well known as Lord Wrenbury points out. It is apparently the manner in which the moneylender in the present case conducts his business.' In such a case his income tax return would show not only what he received in the year but also what he was due to receive as a result of the year's business. His books

would afford a basis for his taxation. The appellant contends that he is entitled to deduct debts which though good at the beginning of 1932 proved to be bad in the course of that year owing to the bankruptcy of the debtor. The debts sought to be deducted are in respect of interest which accrued due prior to the year 1932. The headnote to Gleaner Co. v. Assessment Committee (1922 2. A. C. 169) may, I think, be taken as an authority for holding that the deduction cannot be allowedthat any deduction must be limited to bad debts connected with the business of the year under consideration, in this case 1932. The headnote reads: "In assessing the annual profits of gains derived from a trading concern for the purposes of the Income Tax Law, 1919, of Jamaica (which Law closely follows the English Income Tax Acts) the taxpayer is not entitled under section 10 to a deduction in respect of a debt found to be bad in the year of assessment but incurred in a previous year." Section 10 of the Jamaica Ordinance (the case was on appeal from the Full Bench of the Jamaica Supreme Court to the Privy Council) sufficiently resembles the provisions of the Local Ordinance to which I have referred to be an authority. And the following passage from Lord Buckmaster's judgment in delivering the judgment of the Board at p. 173 indicates that the deduction sought cannot be allowed. He says: "The appellants contend that the true meaning of section 10 is that debts may be deducted in the year in which they are found to be bad from the annual profits of that year, although the debt may have been long antecedently incurred, or, in other words that for the purposes of the Statute the actual calculation of the annual profits in any particular year involves allowance for debts included in former accounts as good or doubtful, but discovered as bad in the year under consideration. Their Lordships find themselves unable to accept this contention." This confirms the view which I have formed that the interest in this case cannot be set off against the income from other sources in 1932. The next passage in the judgment is in point on the questions of the provision for the deduction of bad debts and the custom of business men, so I quote it. "The income that is to be returned is the net income after deducting the expenses of acquiring the same, and, but for section 10, it might well be argued that in the case of a business debts not actually received formed no part of the income at all, although, as is well known, the annual profits or gains of a trader are not properly measured by considering only the moneys taken." In connection with the Privy Council case to which I have referred it is important to note that Income Tax was introduced into Jamaica for the first time in 1919 and the taxpayer sought to deduct debts found to be bad in 1919 but having first arisen from sales made prior to 1919. In the present case the Ordinance was introduced in 1933 and the appellant seeks to deduct debts found to be bad in 1932 but which arose prior to

that year. In my view the basic principle of taxation under the Ordinance must be that a person is taxed on what he receives in the year preceding the year of assessment. It may be that a trader is taxed on what he receives plus what he is due to receive, but in his case should the latter prove to be a bad debt he becomes entitled to a refund in respect of it under section 26 of the Ordinance. Should it so happen that the debt which is entered in his books as a good debt becomes bad prior to his making his return then he is entitled to deduct it in arriving at his taxable income; the deduction presupposes the debt having been entered on the credit side. In the event of the debt remaining good and being paid after the taxpayer has furnished his return and paid tax on it, then he would be entitled to omit the amount from his next year's return. For the reasons I have given the question submitted to me will be answered in the negative.

The remaining issue in this appeal together with the question of costs by joint request of counsel is adjourned generally with liberty to apply.