1931 (3) TMI 30 - Other - Income Tax

Summary

Issues Involved:
1. Liability of Pondicherry Railway Company Ltd. to be assessed for Income Tax on income derived from working the Pondicherry Railway.
2. Whether Pondicherry Railway Company Ltd. carries on business in British India within the meaning of the Income Tax Act.
3. Quantum of income liable to assessment to Income Tax, specifically whether only the portion payable under the concession to the French Colonial Government is assessable.

Issue-wise Detailed Analysis:

1. Liability of Pondicherry Railway Company Ltd. to be assessed for Income Tax on income derived from working the Pondicherry Railway:
The Pondicherry Railway Company Ltd. was assessed to Income Tax and super-tax for the years 1925-26 and 1926-27. The assessments were confirmed by the Assistant Commissioner of Income Tax, Southern Range, Madura. The company appealed, and the Commissioner referred four questions of law to the High Court of Judicature at Madras, of which three are pertinent here.

The primary question was whether the Pondicherry Railway Company Ltd., which is resident outside British India, is liable to be assessed to Income Tax on income derived from the working of the Pondicherry Railway under Section 4 of the Income Tax Act as income accruing or arising or received in British India. The High Court's majority opinion affirmed this liability, which was upheld by the Privy Council. The Council found that the income was "received" in British India within the meaning of the statute, as the agent of the Pondicherry Company, Mr. Rothera, received the profits in Trichinopoly on behalf of the company.

2. Whether Pondicherry Railway Company Ltd. carries on business in British India within the meaning of the Income Tax Act:
The second question was whether the Pondicherry Railway Company Ltd. carries on business in British India. The High Court's majority opinion affirmed this, but the Privy Council did not find it necessary to pronounce on this aspect. They concluded that since the income was received in British India, it was sufficient for determining the company's liability. The place where the business is carried on was deemed immaterial for the purpose of this assessment.

3. Quantum of income liable to assessment to Income Tax:
The third question was whether the income liable to assessment to Income Tax is only the portion payable to the company under the concession with the French Colonial Government. The High Court unanimously answered this in the negative. The Privy Council agreed, stating that a payment out of profits and conditional on profits being earned cannot be described as a payment made to earn profits. The revenue is concerned with the profits at the point they come into existence, not with their subsequent application. The payment to the French Colonial Government was seen as a distribution of profits, not an allowable deduction from these profits.

Conclusion:
The Privy Council upheld the High Court's decision with variations. They declared that the Pondicherry Railway Company Ltd. is liable to be assessed to Income Tax for the years 1925-26 and 1926-27 on the income received in British India from the South Indian Railway Company Ltd. The Council also affirmed that no allowance is deductible in respect of the half share of net profits payable to the French Colonial Government when computing the profits or gains for Income Tax assessment. The appeal was dismissed, and the respondent was awarded costs.