True legal character of payments controls tax treatment; monthly advances under the bond were loans, not annuities.

Tax liability depended on the true legal character of the instrument, not the labels the parties used. On proper construction of the bond and accompanying letter, the monthly sums advanced to Mr. Hart were loans secured on a capital sum payable at death, with no personal liability to repay during lifetime, rather than annuities or annual payments. The society's underlying obligation remained a capital obligation, reduced only by loans actually advanced. The fact that the lender and obligor were the same entity did not alter the analysis. The sums were therefore not chargeable to income tax as annuities or annual payments.

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Issues: Whether the monthly sums paid under the bond and accompanying letter were loans or annuities or other annual payments chargeable to tax and deductible at source under the Income Tax Act, 1918.

Analysis: The legal character of the arrangement depended on the true construction of the bond and letter. The labels used by the parties were not decisive. On the proper construction, Mr. Hart had a right to borrow monthly sums on the security of the sum payable at death, with no personal liability to repay during his lifetime, but with liberty to repay if he chose. The society's obligation remained a capital obligation to pay a sum at death, reduced only by loans advanced under the agreement. The coincidence that the lender and the obligor were the same entity did not alter the legal nature of the transaction.

Conclusion: The sums paid to Mr. Hart were loans and not annuities or annual payments; they were not chargeable as such for income tax purposes.

Ratio Decidendi: In determining tax liability, the court must ascertain the true legal nature of the transaction from the instrument itself, and the parties' description of a payment as a loan or annuity is not conclusive where the contractual rights and obligations show its real character.

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