The true nature of the 'discount' or the premium is to be ascertained from all the circumstances of the case, and will fall to be determined as a matter of fact by the Commissioners, considering factors such as the terms of the loan, the rate of interest, the nature of the capital risk, and the parties' intention in fixing the terms of the contract.

JUDGMENT

LORD GREENE, M. R. - For the purposes of this judgment the following short statement sufficiently explains the facts of the case. Previously to the year 1933, the appellant company had advanced to a Finnish company (whose whole issued share capital belonged beneficially to the appellants) sums amounting to $319,690. The Finnish company had been formed by the appellants for the purpose of manufacturing and supplying to the appellants the wood pulp required by them in their business of manufacturers of newsprint. In the absence of any finding to the contrary, it must be assumed that these advances were repayable on demand. In these circumstances the two companies entered into an agreement for funding the outstanding indebtedness. This agreement was dated November 11, 1933, but it operated in effect as from January 1, 1933. Its essential terms may for present purposes be thus summarised : (1) The Finnish company agreed to issue to the appellants 680 notes (which were freely assignable) of Pounds 500 each, amounting in all to Pounds 340,000, that is, Pounds 20,400 more than the Pounds 319,600 outstanding in respect of principal; in other words, these notes were to be issued at what is commonly called a "discount" of 6 per cent. (2) The notes were to bear interest at 1 per cent. above the lowest discount rate of the Bank of Finland during each year, but in no case higher than 10 per cent. per annum. (3) The notes were to be repaid as to Nos. 1 to 100 on November 15, 1933, and thereafter as to twenty-nine notes in consecutive order of numeration on April 6 in each following year. (4) Each notes was to be redeemed at a premium of 20 per cent. if in the next year before the year of its redemption the net profits of the Finnish company reached a specified level.

There is no suggestion that this agreement was other than a bona fide commercial transaction. The business object is it is apparent from the terms of the agreement and the circumstances in which the appellant company owned all the shares in the Finnish company affect the situation one way or another, once it is conceded that the making of the agreement was a perfectly bona fide affair. One or two points may here be noted. The rate of interest provided for by the notes is on the fact of it what appears to be an ordinary commercial rate - in fact it worked out at about 5 per cent. during the years in question. The provision for repayment of the first hundred notes on November 15, 1933, that is four days after the date of the agreement, was a natural condition to be imposed by the appellant in the circumstances. They were consenting to the funding of a loan which was repayable on demanding by making it repayable over a period of twenty years. The immediate payment of the first hundred notes left 580 to be redeemed in annual batches of twenty-nine, a process for which twenty years would be required. In is not unnatural that the appellants should have stipulated for payment down of a substantial amount.

The secretary of the appellants, Mr. Lanktree, gave evidence which was accepted by the Special Commissioners to the effect that, as to the repayment of the advances, the appellants had always had in mind "the element of risk which might arise through trouble between Finland and Russia." In view of the manner in which that apprehension has justified itself, it can scarcely be suggested that on a contract for funding a loan at a reasonable commercial rate of interest the appellants were taking excessive precautions by insisting on the notes being issued at a discount and redeemable at premium. It is stated in the case that the interest, discount and premiums taken together represented a return of about 7 3/4 per cent. on the amount outstanding. The fact that such a calculation can be made is, of course, no justification for asserting that the discount and the premium ought to be treated as income for the purposes of the Income Tax Acts. Whether they should be so treated is the qu