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TMI Blog1931 (3) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... he working of the Pondicherry Railway under Section 4, Income Tax Act as income accruing or arising or received in British India? (c) Whether the Pondicherry Ry. Co. Ltd. carries on business in British India within the meaning of the Income Tax Act? and (d) Whether in any event the income of the said company that. is liable to assessment to Income Tax is only that portion which is payable to it under the concession between it and the French Colonial Government? 2. The Commissioner, as required by the Act, stated his opinion on the questions referred which was to the effect that Questions (b) and (c) fell to be answered in the affirmative and Question (d) in the negative. 3. In the High Court the learned Chief Justice (Sir Murray Coutts Trotter) was of opinion that Questions (b) and (c) should be answered in the negative, but the majority of the Court (Odgers and Beasley, JJ.) were of opinion that these-questions should both be answered in the affirmative. This accordingly became the decision of the Court. As regards Question (d) the Court was unanimously of opinion in the negative. 4. The assessments having thus been upheld the Court under Section 66-A(2) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structed the projected line of railway, which was entirely situated in French territory, and effected the junction at the frontier with the system of the South Indian Railway. As empowered in the convention with the French Minister the company entered into an agreement dated 25th March 1879, with the South Indian Railway Company Limited whereby the latter undertook to work, manage and maintain the Pondicherry Railway. The agreement in force between the two railway companies at the time of the assessments in question was dated 30th December 1890. Such agreements between an owning company and a working company are familiar in railway practice and may take various forms. Examples which have come before the Courts are discussed in their legal bearings in Sevenoaks o. Railway Co. v. London, Chatham and Dover Railway Co. (1879) 11 Ch. D. 625, South Behar Bail-tuay Co. v. Inland Revenue Commissioner (1925) A.C. 476, Inland Revenue v. Edinburgh and Bathgate Railway Co. (1926) S.C. 863 and Inland Revenue v. Dublin and Kingstown Raihvay Co. (1926) 5 Accountant's Tax Cases 721. The working agreement in the present case is on simple lines. The South Indian Company undertakes to work the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n honorarium of 21 a year from the Pondicherry Company 'for services rendered. 14. The Chief Engineer and the General Traffic Manager of the South Indian Company are also ex-officio officers of the Pondicherry Company and receive an honorarium of 10 10s. each. The revenue accounts of the Pondicherry Company are prepared by the Chief Auditor of the South Indian Company acting as Chief Auditor of the Pondicherry Company. 15. The Pondicherry Company has an office at Triehinopoly with a sign-board. 9. Exhibit C is a letter dated 5th April 1923, addressed from London by the Secretary of the Pondicherry Company to Mr. Scott (Mr. Rothera's predecessor', Agent, Pondicherry Railway Co., Ltd., Triehinopoly, enclosing a statement of the expenses of administration of the company in England for the year. The letter proceeds: The figures now furnished will enable you to prepare the Revenue account for the year ending 31st March 1923, showing the amount of net profits divisible between the French Colonial Government and the company. When this has been done you will be good enough to pay over to the French authorities the moiety of the net profits in terms of Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribes that such profits or gains shall be computed after making allowance for inter alia (ix) any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains. Business is defined in Section 2(4) as including any trade commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture, 14. In the Court below the question whether the assessed income of the Pondicherry Company accrued or arose in British India within the meaning of the Act was much discussed, and the opinion of the majority of the Judges as embodied in the order of the Court of 26th March 1929, was that it did so accrue. Their Lordships do not find it necessary to pronounce upon this aspect of the case and have come to no conclusion with regard to it, for they are satisfied that the income in question was received in British India within the-meaning of the statute, which is sufficient for the determination of the company's liability. 15. The argument presented by Mr. Mick-lethwaite for the appellants was to the effect that the facts when critically examined demonstrated that Mr. Eothera w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in terms of the convention and this is not a mere matter of dividing it by two for as appears from Ex. D, the share remitted to London is not the same as the share remitted to the French Government. It is one half of the net profits as ascertained in terms of the convention that the French Government receives and the computation of this half involves calculation on the part of Mr. Eothera as the agent of the Pondicherry Company. He is instructed from London to pay over to the French authorities their moiety. How he can obey this instruction and pay over what, on the appellants' submission, he has not received requires for its appreciation a metaphysical subtlety remote from the prosaic realm of Income Tax law. How it may also be asked can he purchase a draft on London unless he has the wherewithal to pay for it? The attempt to present Mr. Eothera as an animated post office fails when it is realized that his functions far transcend the mere mechanical act of transmitting a sum to its recipient. He is the paid agent at Triohinopoly of the Pondicherry Company carrying on their agency in an office bearing their name and he is entrusted with the important duties on their beha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erior consequences, and their Lordships make no pronouncement on the point. 21. Question (d) relates to the quantum of the assessment. The statute permits the assessee in computing the profits or gains of any business carried on by him to deduct: any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains, 22. The Pondicherry Company is taken bound in the convention with the French Minister to make over to the Colonial Government one half of the net profits of the undertaking arrived at in the manner prescribed in the convention. It is claimed for the company that when it makes over to the Colonial Government their half of the net profits it is making an expenditure incurred solely for the purpose of earning its own profits. The Court below has unanimously negatived this contention and in their Lordships' opinion has rightly done so. A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits and gains of the Pondicherry Railway Company accrued in British. India and hence it is liable to be taxed and that the said Company carries on business in British India within the meaning of the Indian Income Tax Act doth answer Questions (b) and (c) in the affirmative. and substituting therefore the following: This Court doth declare in answer to Questions (b) and (c) that the Pondicherry Railway Company Limited is liable to be assessed to Income Tax for the years 1925-26 and 1926-27 under Section 4(1), Income Tax Act on the income derived by it from the payments made to it by the Section I. Ry. Co. Ltd. in respect of the working of the Pondicherry Railway as being income-received in British India by the Pondicherry Ry. Co. Ltd. from the carrying on of its business. 24. And that the order of the High Court of 1st May 1929, be varied by deleting therefrom the following words: And this Court being of opinion that the; yearly payment made to the French Colonial Government is a distribution of profits and not an allowance deductible from these profits doth answer in the negative question (d), viz., Whether in any event the income of the said Company tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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