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TMI Blog1935 (4) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... e two railways were originally constructed with the capital found under the following Agreements:-in the case of the Ahmadpur Katwa Railway Co., Ltd., an agreement of the 8th May, 1922 between the Secretary of State for India in Council and the Ahmadpur Katwa Railway Co., Ltd., providing for the Railway Company finding a certain sum of money and handing that money over to the State and the State thereafter was to construct and operate the Railway. In the agreement the following provision occurs with regard to the liability that the State assumed in respect of moneys payable to the Railway Company under the contract. I am now quoting from Schedule II, Clause 3 of the Agreement:- The net earnings of the said Railway as defined in Clause I of this contract together with receipts on account of transfer fees, if any, and such interest as may accrue during the half-year from investment or deposit in banks and any profits realised on the sale of any such investments referred to in Clause 30 of the above-written indenture less such sum as may be payable by way of interest on debentures, if any, shall constitute the net receipts of the company for the said half-year and shall be applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t earnings of the said railway as defined in Clause 3 of this schedule together with receipt on account of transfer fees, if any, any such interest as may accrue during the half-year on the un-expended capital of the capital of the company referred to in Clause 22 of the scheduled contract less such sum, as may be payable by way of interest on debentures, if any, shall constitute the net receipts of the company for the said half-year and shall be applied by the Secretary of State in manner and subject as hereinafter appearing :- (a) When the net receipts of the company in any year shall exceed the minimum amount sufficient to pay interest on the paid up share capital of the company at the rate of 5 per cent, per annum such excess shall be applied towards the payment of office expenses and the expenses of management and direction of the company up to the limit provided for in Clause 6 of this Schedule and the balance, if any, shall be divided equally and one moiety thereof shall be retained by and belong to the Secretary of State and the other moiety shall be paid to the company. (b) When the net receipts of the company for any year do not amount to a sum sufficient to pay int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Agreement made on the 19th of May, 1923 between the Secretary of State for India in Council and the Katakhal Lalabazar Railway Co., Ltd. The companies made an issue of shares to the public and in the Prospectus, a portion of which is set out in the Paper Book, it is stated that the concessions granted to the company by the Secretary of State for India are as follows :- (1) The Secretary of State will guarantee interest at the rate of 3 percent, per annum on the share capital of the company for the time being paid-up, after the close of the period during which interest in payable out of capital; (2) The payment of interest out of capital during construction at a rate not exceeding 4 per cent, per annum on capital as paid up . As a result of the issue of shares consequent upon that prospectus the capital moneys of the companies were paid up and transferred in accordance with the agreement to the Indian Treasury of the Secretary of State. During the income tax year 1933-34 the two typical companies made profits and received subsidies from the Government as follows :-The Ahmadpur Katwa Railway Co., Ltd., had adjusted profits as per account exclusive of the State sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moneys which were earned by the company as far as liability to income tax is concerned. In that it seems to me I am supported by a decision which was given by the Court in England under a contract which in essential particulars or in relevant particulars was the same as this. That is the case of Nizam's Guaranteed State Railway Co. v. Wyatt 2 Tax Cas. 584 which is reported in Tax Cases Vol. 2, p. 584. In that case the company constructed a Bail way in Hyderabad. The Nizam's Government guaranteed an annuity for 26 years of 5 per cent, on the issued share and debenture capital. The purpose of that anunity was to be applied in paying interest on such capital and in forming a sinking fund for the redemption of the debentures ; subject to provisions for repayment of the sums paid with interest, out of profits earned, and in that case the Court of Appeal in England held that the whole annuity including the sums applied to sinking fund was chargeable with duty. The relevant clause in the agreement between the Government of Nizam and the company is set out at page 585 of the report and it is Article 25. The account of the extract reads as follows:- By Article 25 of the said agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-paragraph (c). Once that money was paid, in my view, it was 'income' and as such came within the grasp of the income-tax and was liable to income-tax in spice of the fact that it was intended to be paid automatically to the shareholders. Similar provision applies in the other case and a similar result follows. Answering the questions that have been put to us in the reference : on the first question put to us in the reference whether on a proper construction of the terms of the Agreement between the company and the Secretary of State for India in Council the subsidy paid by the latter is the Income of the former the answer is in the affirmative. On the second question, Whether the 'guaranteed interest' payable to the shareholders is deductible under Section 10 (2) (iii) of the Income Tax Act it was not seriously contended by Mr. Pugh that the answer would be otherwise than in the negative. The answer is clearly that the guaranteed interest payable to the shareholders is not deductible under Section 10 (2) (iii) of the Income Tax Act. The third question Was whether the profits earned by the company independent of the State subsidy are, in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he share holders and accordingly the guaranteed interest, when received by the share holders, constituted income taxable in their hands, but not the income of the company. A similar argument was put before us by Mr. Pugh. He sought to induce us to accept his contention that the company was no more than a conduit pipe between the Secretary of State for India and the share holders of these companies. In that connection Mr. Pugh relied upon the case of In re South Slanharran Colliery Co. ,In re 12 Ch.D 503. In that case Mr. Jegon had contracted with a trustee for an intended company to sell to the company a coal mine and works for 35,000 of which 10,000 was to be paid in money and the remainder in paid-up shares of the company. He agreed to pay the company during the first two years of its incorporation such a sum as together with the net profits of the company would be equal to interest at 5 per cent, on the paid-up capital; such money to be repaid to him in a certain event. The company was formed, and the contract was recited and adopted in the Articles of Association. The profits not being sufficient to pay 5 per cent., Jegon paid a sum of money to the Directors for distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cent, on its share capital. On the 11th October, 1899, war having broken out, the line was seized and worked by the British military authorities until the end of the War. On the 18th February, 1902, the British Government gave notice to expropriate the Railway under the terms of the concession. They recognised the validity of the concession and admitted liability to pay all arrears of interest. They paid 97,506 18s. 11d. as guaranteed interest on share capital at 4 per cent, per annum from the 1st January, 1899 to the 14th November, 1903 in addition to the other payments on the expropriation , and it was held by the Court of Appeal (the judgment being given by Lord Justice Fletcher Moulton), That the sum of 97,50616s. 11d. was not part of a sum paid by the British Government as the gross revenue of the company earned as a trading company from the 1st January, 1901, to the 14th November, 1903, and that after deducting certain expenses incurred by the company during the same period, the benefit of the three years' average must be applied and income tax was payable on one-third of the balance only . The importance of this case is that it shows that the amount paid by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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