TaxTMI 
TaxTMI 
1935 (4) TMI 13
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....o., Ltd. In the reference it is set out that these 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 ....
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....here is this clause in Schedule II, Clause 4, headed, Guarantee. 4. The net 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....
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....e capital of the company for the time being paid-up." I ought to have said that was 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 3½ 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 :-T....
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....rpose of payment out as interest or dividend. In my view, the subsidy is in lieu of moneys which might have been earned by the company and has the same nature as 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 o....
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.... rate of 3½ per cent, per annum on the share capital of the company." What had to be paid over by the State was an arithmetical sum of money fixed definitely by the provisions of Schedule II, Clause 4, sub-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 tha....
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....State for India under the terms of the agreement between the company and the Secretary of State in order to make up the minimum guaranteed interest payable to the share holders and because that was the position, the company was merely a trustee on behalf of the 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,....