TMI Blog1940 (3) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... y of State, who is empowered to/appoint one member of the Board of Directors. The Court has been informed that the director appointed by the Secretary of State possesses a power of veto. 2. By virtue of the contract of 1882 the company undertook to pay into the Bank of England to the credit of the Secretary of State a sum 3,000,000 and the Secretary of State undertook during the continuance of the contract to pay half yearly to the company out of the revenues of India interest at the rate of 3| per cent, per annum on the amount. The 3,000,000 was duly paid by the company into the Bank of England to the credit of the Secretary of State, who has paid to the company in London half yearly the amount required to meet the interest due, but the Secretary of State has reimbursed himself at the end of the year out of the profits of the undertaking. The 3,000,000 represented the company's capital and the Secretary of State guaranteed interest on it at the rate mentioned. The contract also provided for division of the surplus profits between the Secretary of State and the company according to their respective shares in the capital of the undertaking. 3. The contract of 1882 conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Bengal Nagpur Railway Co. Ltd. v. The Secretary of State for India I.L.R.(1922)Cal. 815 : 1 I.T.C. 178. This decision however conflicts with a later decision in England affecting the company , The Madras and Southern Mahratta Railway Co. Ltd. v. The Commissioner of Inland Revenue (1926) 12 Taxas Cases 1111 and it is this conflict which has given rise to the reference. The Income Tax authorities say that the Calcutta decision is wrong and that the company in calculating its annual profits must include the amount of guaranteed interest received in London. In order that the question may be decided the Commissioner of Income Tax, in agreement with the company, has referred to this Court under the provisions of Section 66(1) of the Indian Income Tax Act, 1922, the following question: Whether the said sum of ₹ 23,33,333 being the equivalent in rupees of the guaranteed interest paid by the Secretary of State for India under the terms of the contracts dated the 1st June, 1882 and 26th June, 1908, between the Secretary of State and the company which was deducted for the purpose of the company's return for the accounting year 1936-37 is liable to assessment in the hands of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e question is, or to put it in another way, are they to he taxed on that balance, or are they to be taxed on the balance plus the amount of the guaranteed interest, which is only putting the same thing in another way. 8. In deciding the case against the company the learned Judge said: If you put it in commercial or financial language or look at it from the commercial or financial point of view, the position simply is that these shareholders have been paid out of the proceeds of the working of the Railway, and the Revenues of India have not paid them a penny. The money they have got is simply because the railway has been so successful, and for no other reason they have got it. If it had not been successful they would have got some of it from the Secretary of State for India, but that position has not arisen; or, if you use language framed more exactly with respect to tax law, this, in my judgment, is the position, that the railway company have earned all these profits, all their one-fifth share, or whatever it is, of the profits of the railway company, and it does not matter in the least that they have had to apply those profits being profits, from the working of the railway, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king are earned in India and the payment by the Secretary of State in London is merely a provisional payment which he recovers out of the profits in India. 10. There are cases arising under the Indian Income Tax Act, which also militate against Mr. Grant's contention. In Sarupchand Mukumchand v. The Commissioner of Income Tax Bombay (1931) 5 I.T.C. 108, the Bombay High Court had to consider whether Section 4(1) of the Indian Income Tax Act, 1922, applied in these circumstances. A company registered in Indore, a Native State, entered into an. agreement with a firm in Bombay under which the firm was to open and maintain at the company's expense shops in Bombay and elsewhere for the sale, of the company's goods, to keep the books of account in Indore in respect of all sale proceeds and disbursements of-the company, to charge a commission of 1 1/2 per cent, on the gross sale proceeds of all cloth and yarn produced by the company and to pay itself out of the moneys of the company all sums due to it by way of commission or otherwise. The sale proceeds of the Bombay shop were all sent to Indore and the commission was paid there. It was contended, that in these circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X
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