Principal and interest must be separated for tax purposes: only interest receipts are taxable and only interest payments are deductible.

Receipts and payments under the Ordinance were to be split between principal and interest according to their legal appropriation. Amounts received after the occupation period were not taxable when they represented repayment of principal, but were taxable to the extent they represented interest. Likewise, further payments made to creditors were deductible only insofar as they represented interest on borrowed money; the portion attributable to principal was not an allowable business deduction. The operative tax treatment therefore depended on whether each amount was referable to principal or interest.

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Issues: (i) whether amounts received after the occupation period under the Ordinance were taxable only to the extent they represented interest or could also be taxed when appropriated towards principal; (ii) whether further payments made to creditors under the Ordinance were deductible only to the extent they represented interest and not when they represented repayment of principal.

Issue (i): whether amounts received after the occupation period under the Ordinance were taxable only to the extent they represented interest or could also be taxed when appropriated towards principal.

Analysis: Payments made in depreciated occupation currency validly discharged debts under the law then in force, but the Ordinance revived the original debt to the extent the earlier discharge was scaled down. In computing the profits of a money-lending business, repayments of principal are not income, whereas receipts referable to interest are taxable. The same receipt may therefore be divisible between principal and interest according to the lawful appropriation of the payment.

Conclusion: The amounts received were not taxable when referable to principal, but were taxable when referable to interest; the assessee succeeded on this issue to that extent.

Issue (ii): whether further payments made to creditors under the Ordinance were deductible only to the extent they represented interest and not when they represented repayment of principal.

Analysis: The statutory obligation to make further payment under the Ordinance was real, but for income-tax purposes the character of the outgoing remained decisive. Interest on borrowed money is a business expenditure, but repayment of principal is not an allowable deduction. Accordingly, only that part of the subsequent payment which was properly attributable to interest could be deducted from taxable income.

Conclusion: The assessee was entitled to deduction only for the portion of the further payments attributable to interest, and not for the portion attributable to principal.

Final Conclusion: The references were answered by distinguishing between principal and interest, with tax liability and deductibility depending on lawful appropriation of the payments.

Ratio Decidendi: In a money-lending business, receipts or payments must be classified according to whether they relate to principal or interest; principal repayments are not income and are not deductible as expenditure, while interest receipts are taxable and interest payments are allowable deductions.

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