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TMI Blog1977 (11) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... hose managing agents at one time were M/s. Killick Industries Ltd. The company was registered under the Indian Companies Act on 14th November, 1910. For this reference we are concerned with assessment years 1963-64 and 1964-65, the corresponding previous years being the years ended on 30th September, 1962, and 30th September, 1963. The memorandum and articles of association of the assessee-company have been made annexure A to the statement of case. If the memorandum is perused, the main objects of the assessee-company were to acquire the benefit of and to become subject to the conditions of a concession granted to M/s. Killick Nixon Co. under certain terms and conditions of a letter dated the 14th October, 1910, addressed by the Government of India in the Railway department to M/s. Killick Nixon Co. and of an agreement to be made between the Secretary of State for India in Council of the one part and the said company of the other part for the construction of railways between Murtajapur and Yeotmal in the then Central Provinces of India. There were various other objects mentioned in the memorandum and the powers conferred on the assessee under the articles of the memorandum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on business either directly or through an agent and even in the latter cast the income must be properly regarded as business income. The AAC considered the agreements between the assessee-company and the Secretary of State and emphasised that under certain clauses the assessee-company was debarred from interfering with the actual business of running the railway. In his view, the company was not engaged in any activity whatsover excepting raising the capital and handing over the same to the Secretary of State. It was merely a financier providing the necessary finance for construction and such activity did not constitute business. The assessee-company thereafter appealed to the ITA Tribunal. Alternative submissions were made on behalf of the assessee before the Tribunal. The main contention was that the assessee-company was carrying on business and all the expenditure claimed should have been allowed as revenue deduction. The alternative contention was that even if the income was to be assessed under " other sources ", all the expenses claimed should have been allowed under s. 57 as having been laid out or expended wholly and exclusively for the purpose of making or earning such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation at Murtajapur to Ellichpur and to Yeotmal with such stations, station yards, sidings, crossing places, bridges, viaducts, offices, warehouses, houses for employees, fixed machinery, rolling stock and such other works as shall be necessary or proper for the purpose of the said railway--(clause 4). The land for this purpose is to be provided free by the Secretary of State. The execution is to be undertaken by the Secretary of State through such agency as he would appoint, but at the entire, cost and risk of the company-- (clause 7). The agreement provides that the financial terms and conditions on which the construction and working of the said railway are sanctioned are as provided in Schedule II (clause 16). Clauses 19 to 24 provide for the maintenance and working of the railway after its opening. Clause 20 provides that the Secretary of State shall have full power to enter into any contract or agreement with any working agency for the working, maintenance and management of the said railway during the period of the agreement. There are detailed provisions for regulation of the business, but it is made expressly clear that the assessee-company cannot interfere with or be concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s concerned with financing the construction of a part of a railway system and for that purpose it was absolutely necessary that the construction could not be left to the assessee-company, nor could the assessee-company be permitted to interfere with the day to day management of the railway which will have to be an integrated one regulated and run on the same lines as the main railway with which it was connected, which obviously was the G.I.P. Railway which was the working agency designated by the Secretary of State to run the railway. It appears to us that the approach of the Tribunal, as far as question No. 1 is concerned, was proper and the conclusion arrived at by the Tribunal that this must be deemed to be a business activity and the assessee-company must be held to have carried on business activity for the years in question will have to be sustained. We are fortified in our opinion by a decision of the House of Lords in IRC v. South Behar Railway Co. Ltd. [1925] 12 TC 657. The aforesaid company was incorporated on July 4, 1895, and it entered into an agreement with the Secretary of State on August 7, 1895. The relevant terms of this agreement have been extracted in the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the specific facts found in the case, and accordingly that the decision was open to review ; and having listened to the arguments put before the House, I find myself in agreement with the conclusion of the majority of the Court of Appeal. It is true that the company carries on no trade or manufacture, and that its principal and only function at the present moment is to receive and distribute the fruits of its undertaking ; but that is a part, and a material part, of the purpose for which it came into existence. It was not intended to be a trading but a financial company ; and its main object was, not to construct or work a railway, but to provide funds for that purpose and, as a reward for so doing, to receive a yearly sum for a period and afterwards a lump sum by way of return of capital." Similarly Lord Sumner at page 710 observed as follows: " To ascertain the business of a limited liability company one must look first at its memorandum and see for what business that provides and whether its objects are still being pursued [Korean Syndicate's case [1921] 12 TC 181 ; [1921] 3 KB 258 (CA)]. It is common ground that the company when first incorporated and for some years ..... 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