1940 (3) TMI 13 - HC - Indian Laws

Summary

Issues Involved:
1. Liability of the Madras and Southern Mahratta Railway Company for Indian Income Tax on guaranteed interest received in London.
2. Conflict between the decision of the Calcutta High Court and the English Court regarding the inclusion of guaranteed interest in taxable income.
3. Interpretation of Section 4 of the Indian Income Tax Act, 1922, concerning income accruing or arising in British India.

Detailed Analysis:

1. Liability of the Madras and Southern Mahratta Railway Company for Indian Income Tax on Guaranteed Interest Received in London:
The primary issue was whether the sum of Rs. 23,33,333, received as guaranteed interest by the Madras and Southern Mahratta Railway Company from the Secretary of State for India, should be included in the company's taxable income for the assessment year 1937-38. The company argued that this interest should be excluded from its taxable income, a practice previously approved by the Calcutta High Court in The Bengal Nagpur Railway Co. Ltd. v. The Secretary of State for India. However, this was contested by the Income Tax authorities based on a conflicting decision in England.

2. Conflict Between the Decision of the Calcutta High Court and the English Court:
The Calcutta High Court had earlier ruled in favor of the Bengal Nagpur Railway Company, stating that only the surplus profits received in India should be taxable, and not the guaranteed interest received in London. This decision was in conflict with the English court's ruling in The Madras and Southern Mahratta Railway Co. Ltd. v. The Commissioner of Inland Revenue, where it was held that the guaranteed interest forms part of the company's profits and should be included in the taxable income. Both the company and the Income Tax authorities in the present case accepted the English court's decision as correctly stating the law.

3. Interpretation of Section 4 of the Indian Income Tax Act, 1922:
The company's main contention was that the interest received in London could not be considered as profits accruing or arising in British India under Section 4 of the Indian Income Tax Act, 1922. However, the court referred to the decision of Rowlatt, J., which emphasized that all the profits of the undertaking are earned in India, and the payment by the Secretary of State in London is merely a provisional payment recovered out of the profits in India. This interpretation was supported by other cases under the Indian Income Tax Act, which held that income earned in British India but received elsewhere is still taxable in India.

Conclusion:
The court concluded that the guaranteed interest received by the company in London should be included in its taxable income, as all profits of the undertaking are deemed to accrue or arise in British India. The court answered the question referred in the affirmative, stating that the Rs. 23,33,333 received as guaranteed interest is liable to assessment in the hands of the company. There was no order as to costs, as the reference was made by consent to obtain a judicial pronouncement on the matter.