In cases where the amount recovered by the time is less than the principal due to the occurrence of the grounds for impossibility of collecting the principal and interest claims before the final return on tax base on interest income from non-business loans or the determination and correction of tax base and tax amount, whether the interest income collected before the occurrence of the grounds for impossibility of collection

Article 39(1) of the former Income Tax Act (Amended by Act No. 9897, Dec. 31, 2009); Article 45 subparag. 9-2 and Article 51(7) of the former Enforcement Decree of the Income Tax Act (Amended by Presidential Decree No. 22034, Feb. 18, 2010)

Plaintiff

Head of Namyang District Tax Office

Seoul High Court Decision 2009Nu25691 decided April 13, 2010

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

Article 39(1) of the former Income Tax Act (amended by Act No. 9897 of Dec. 31, 2009; hereinafter the same) provides that “the year to which the total amount of income and necessary expenses of a resident belong shall be the year in which the date when the total amount of income and necessary expenses are determined,” and Article 45 subparag. 9-2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034 of Feb. 18, 2010; hereinafter the same shall apply) provides that “the receipt date of the total amount of income from non-business profits shall be the date of interest payment under an agreement, but where the principal is paid without an agreement on the date of interest payment or before the date of interest payment under an agreement, or where the principal is paid with interest excluded from the calculation of the total amount of income pursuant to Article 51(7) of the former Enforcement Decree shall be the date of interest payment.” Meanwhile, Article 51(7) of the former Enforcement Decree of the Income Tax Act provides that in calculating the total amount of non-business profits, the tax base or the amount recovered from the tax amount collected from the debtor’s.

In full view of the adopted evidence, the court below acknowledged the following facts: (a) on December 13, 2004, when the plaintiff extended KRW 1.5 billion to the non-party on December 13, 2004, the plaintiff paid KRW 1.365 billion ("1.35 billion" in the judgment of the court below seems to be a clerical error of "1.365 billion" in the judgment of the court below; and (b) on December 23, 2004, the plaintiff again lent KRW 450 million to the non-party on December 23, 2004, after deducting KRW 67.5 billion from the non-party, the remaining amount of KRW 380 million after deducting KRW 1.5 billion from the loan of this case; and (c) the defendant paid KRW 1.45 million to each of the plaintiff's global income of KRW 1.5 billion in total income of KRW 385 billion in total income of this case; and (d) the defendant paid KRW 2.865 billion in total income of this case.4 billion in total income of this case.

Based on such factual basis, the lower court determined that, inasmuch as the interest income is calculated as the amount of gross income of the pertinent year is calculated on December 13 and 23, 2004, the interest income is calculated as the amount of interest income for the pertinent year, and thus, the borrower obtains the same economic benefits as the amount of money received, and thus, the borrower is also deemed to have entered into a loan agreement on the loan principal, and as such agreement is effective, the amount deducted as the interest income is included in the leased principal and the interest income shall be deemed as the date of payment pursuant to the agreement under Article 45 subparagraph 9-2 of the former Enforcement Decree of the Income Tax Act and the date of actual interest payment shall be deemed as the date when the interest income was deducted from the interest income of the pertinent year, and thus, if it is apparent that the remaining amount was impossible to recover as of the date of partial recovery of claims, the Plaintiff still failed to meet the requirements for collection of the principal and interest income in the pertinent taxable year as long as the grounds for collection of the interest income did not affect the non-party’s tax exemption.

However, this decision of the court below is not acceptable for the following reasons.

Unlike the Corporate Tax Act, Article 51 (7) of the former Enforcement Decree of the Income Tax Act does not provide an institutional device to reflect the amount of interest income in the calculation item even if the amount of loss was incurred due to the failure to recover the principal of non-business income later, and therefore, it appears to be a provision to prevent unjust result in imposing interest income tax. The above provision is applicable to the case where the entire amount recovered until a certain cause for recovery occurs prior to the final return on tax base or the determination and correction of tax base and tax amount, and there is no special exception to the case where it is difficult to discuss the possibility of recovering the principal claim, which is the source of income under the Income Tax Act. In full view of the above, if the amount recovered falls short of the principal amount prior to the final return on tax base of non-business income or the determination and correction of tax base and tax amount, even if there was an actual recovered interest income in the taxable year prior to the occurrence of a certain cause not to recover the principal, it shall not be deemed to be subject to the income tax. This case cited by the court below.

However, according to the reasoning of the judgment of the court below, the plaintiff paid only KRW 125 million as interest name to the non-party until August 4, 2005, and part of KRW 765 million as part of principal, and the other amount was in a situation where the non-party was not likely to be repaid due to default or wind around 2005. Thus, in light of the above legal principles, there is room to deem that each of the interest holders of this case is subject to Article 51 (7) of the former Enforcement Decree of the Income Tax Act, and thus, it cannot be subject to taxation of interest income tax. However, the court below did not sufficiently examine this point and determined that the disposition of this case was lawful on the ground that each of the interest holders of this case is not subject to the above provision on the ground of its reasoning. The judgment below erred by misapprehending the legal principles on whether interest income is subject to taxation, etc., and failing to exhaust all necessary deliberation, which affected the conclusion of the judgment. The ground of appeal assigning this error is with merit.

Therefore, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Jeon Soo-ahn (Presiding Justice)