1935 (4) TMI 13 - HC - Indian Laws

Summary

Issues Involved:
1. Whether the State subsidy paid to the companies constitutes "income" under the Indian Income Tax Act.
2. Whether the "guaranteed interest" payable to the shareholders is deductible under Section 10(2)(iii) of the Income Tax Act.
3. Whether the profits earned by the companies independent of the State subsidy are taxable as the companies' profits.

Issue-wise Detailed Analysis:

1. State Subsidy as "Income":
The primary issue was whether the State subsidies received by the Ahmadpur Katwa Railway Co., Ltd., and the Katakhal Lalabazar Railway Co., Ltd., constituted "income" under the Indian Income Tax Act. The court referred to the agreements between the companies and the Secretary of State for India, which guaranteed interest on the share capital of the companies. The subsidies were provided to ensure a minimum guaranteed interest to the shareholders. The court concluded that the subsidies were in lieu of earnings and thus constituted "income" as they were available for payment as interest or dividend. The court supported this view by referencing the case of Nizam's Guaranteed State Railway Co. v. Wyatt, where similar subsidies were deemed taxable income. The court held that the subsidies were "income" and thus liable to income tax.

2. Deductibility of "Guaranteed Interest":
The second issue was whether the "guaranteed interest" payable to the shareholders was deductible under Section 10(2)(iii) of the Income Tax Act. The court noted that Mr. Pugh did not seriously contest this point and concluded that the "guaranteed interest" was not deductible under the specified section. Thus, the answer to this issue was clearly in the negative.

3. Taxability of Profits Independent of State Subsidy:
The third issue was whether the profits earned by the companies independent of the State subsidy were taxable as the companies' profits. Again, Mr. Pugh did not seriously contest this point. The court affirmed that the profits earned independently of the State subsidy were indeed taxable as the companies' profits. The answer to this issue was also in the affirmative.

Separate Judgment:

Costello, J.:
Costello, J., addressed the argument that the State subsidy was not taxable in the hands of the company because it was merely a trustee for the shareholders. Mr. Pugh argued that the company acted as a "conduit pipe" between the Secretary of State and the shareholders. Costello, J., rejected this argument, stating that the moneys provided by the Secretary of State should be treated as the company's "income." He referenced the cases of Blake and Nizam's Guaranteed State Railway Co. and added the case of Pretoria Petersburg Railway Company Limited v. Elgood, which supported the view that such subsidies were income and thus taxable. Costello, J., agreed that the first question must be answered in the affirmative and concurred with the conclusions on the other two issues.

Conclusion:
The court ruled that the State subsidies received by the companies were "income" and thus taxable. The "guaranteed interest" payable to the shareholders was not deductible under Section 10(2)(iii) of the Income Tax Act. The profits earned independently of the State subsidy were taxable as the companies' profits. The assessees were ordered to pay costs to the Commissioner of Income Tax.