Receipt by local agent in British India and profit-share deduction rules determine taxability of railway receipts.

Receipt by a local agent in British India on behalf of an assessee constitutes receipt by the assessee in British India where the agent does more than act as a mere conduit and receives and deals with the funds under instructions. A payment of one-half of net profits to the French Colonial Government was treated as an application or division of profits after they arose, not as expenditure incurred solely for earning those profits, so no deduction was allowable. The analysis therefore supports taxability of the receipts and denial of the profit-share deduction.

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Issues: (i) Whether the sums payable by the South Indian Railway Company to the Pondicherry Railway Company were received in British India by the assessee through its agent and were therefore chargeable to tax; (ii) whether the annual payment of one-half of the net profits to the French Colonial Government was an allowable deduction in computing business profits.

Issue (i): Whether the sums payable by the South Indian Railway Company to the Pondicherry Railway Company were received in British India by the assessee through its agent and were therefore chargeable to tax.

Analysis: The statutory scheme taxed income accruing, arising, or received in British India. On the facts, the local agent at Trichinopoly did more than act as a mere conduit: he ascertained the amount due under the working agreement, received payment on behalf of the company, and then dealt with the money under instructions, including remittance of the French Government's share and the balance to London. The receipt by the agent in British India was therefore receipt by the company in British India.

Conclusion: The issue was answered against the assessee and in favour of Revenue.

Issue (ii): Whether the annual payment of one-half of the net profits to the French Colonial Government was an allowable deduction in computing business profits.

Analysis: The deduction provision allowed only expenditure incurred solely for the purpose of earning profits. The payment to the French Colonial Government was not an outgoing incurred to earn profits but a division or application of profits after they had arisen. A contractual charge on profits or a participation in profits by another party does not convert such a distribution into deductible expenditure.

Conclusion: The issue was answered against the assessee and in favour of Revenue.

Final Conclusion: The assessee was held liable to tax on the receipts obtained in British India, and no deduction was allowed for the share of net profits payable to the French Colonial Government; the appeal failed.

Ratio Decidendi: Money received in British India by a local agent on behalf of the assessee is taxable as receipt by the assessee in British India, and a contractual division of profits after they arise is not deductible expenditure incurred for earning those profits.

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