1. This is a reference at the instance of the Commissioner under s. 256(1) of the I.T. Act, 1961. The following two questions of law have been referred to us :
'(1) Whether, on the facts and in the circumstances of the case, and having regard to the provisions of the agreement, entered into between the assessee-company and the Secretary of State for India, dated the March 27, 1916, the income derived by the assessee-company was assessable as business income
(2) If the answer to the question No. (1) is in the negative and the income is properly assessable as income from 'other sources', whether, on the facts and in the circumstances of the case, the expenses claimed by the company were deductible as expenses wholly and exclusively laid out or expended for purposes of earning its income ?'
2. The assessee before us is a public limited company, whose managing agents at one time were Killick Industries Ltd. The company was registered under the Indian Companies Act on November 11, 1910. For this reference we are concerned with assessment years 1963-64 and 1964-65, the corresponding previous years being the years ended on September 30, 1962, and September 30, 1963.
3. The memorandum and articles of association of the assessee-company have been 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 Killick Nixon & C0. under certain terms and conditions of a letter dated the October 14, 1910, addressed by the Government of India in the Railway department to 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 of association were comprehensive in nature and enabled the assessee-company to carry on the business of construction of railways and to run the railways either by itself or in conjunction with other, more particularly with the Secretary of State for India in Council.
4. Pursuant to the original arrangement, the assessee-company entered into an agreement with the Secretary of State for India in Council on March 27, 1916 (annexure B to the statement of case), which was for the purpose, inter alia, of constructing the railway mentioned in clause 4 of the agreement; but we will refer to the clauses of this agreement in some detail subsequently. There was a further agreement by way of a supplemental agreement dated October 3, 1917, between the assessee-company and the Secretary of State for India in Council which has been made annexure C to the statement of case.
5. For the assessment years under consideration, the ITO went into the nature of the assessee's income in order to determine whether it could be regarded as business income or income under 'other sources'. This was done with a view to examine the allowability of certain expenditure claimed as having been incurred by way of commission paid to the managing agents, advertisement charges, auditors' fees, directors' fees, expenses for transfer of shares, printing, stationery, postage and legal expenses. The ITO took the view that the assessee's role was only that of an investor for finding money for the construction of the railway and, therefore, the income should be assessed under the head 'other sources'. He, therefore, considered the expenses in respect of which deduction has been claimed and allowed the aggregate amount of Rs. 26,424 as admissible deductions under s. 57(iii) of the Act. Accordingly, for both the assessment years commission paid to managing agents, auditors' fees, directors' fees, expenses for transfer of shares, printing, stationery charges and legal charges were disallowed.
6. The matters were thereafter taken in appeal to the AAC. Before him it was contended that the assessee-company was formed with the object of constructing and working a railway line and that the actual working under the agreements with the Secretary of State was only one of the methods which was open to the assessee-company to carry on its business. It was submitted that the assessee-company could carry on business either directly or through an agent and even in the latter case 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 whatsoever 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.
7. 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 income. The Tribunal accepted both the contentions of the assessee. The Tribunal considered the agreement between the assessee-company and the Secretary of State and opined that this brought out that the assessee was carrying on the business in association with or along with or as a joint venture with the Secretary of State. I had, no doubt, in its mind that the assesssee was carrying on business of construction of railways and having them worked through proper arrangement. According to the Tribunal, there was nothing to indicate that this was not a business activity. According to it, further, there was a continuous activity of the company in the nature of business. It was, therefore, clearly of the view that the income earned by the assessee from and out of these railways constructed by the Secretary of State with the finance provided by the company, was business income and had to be assessed as such. As stated earlier, the alternative contention of the assessee was also accepted. The Tribunal opined that even if it was assumed that this was an income under 'other sources' it was necessary for the purpose of earning the income that it should have managing agents, auditors, etc. According to the Tribunal, all the expenses incurred by way of legal charges, stationery, postage and other items had been laid out or expended wholly and exclusively for the purpose of making or earning the income of the assessee-company. It is in this background that the two questions earlier extracted have been referred to us for our opinion.
8. Joshi took us through the objects of the assessee-company as set out in the memorandum and stressed clauses 1, 2, 3, 7, 28 and 31. It is clear that the principal object of the assessee, as stated by the Tribunal, was to take the benefit of the concession granted to Killick Nixon and Co. And the agreements to be made between the said firm and the Secretary of State were to construct the railways for the portions or at the places mentioned in object No. 3. It was pursuant to these objects that the agreements with the Secretary of State were executed. Joshi relied on the portions of the agreements under which it is made clear that the company had to supply to the Secretary of State the funds required to enable the Secretary of State to construct, complete and make ready the railway from the Great Indian Peninsular Railway Station at Murtajapur to Elllichpur and to Yeotmal with such stations, station yards, sidings, crossing places, bridges, viaducts, offices, warehouses, houses for employees, fixed machinery, following stock and such other works as shall be necessary or proper for the purposes 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 th 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 concerned in the business which is to be worked by the working agency. The company, however, continues to have the obligations to furnish further funds as may be required by the Secretary of State under the circumstances contemplated in the agreement. It is clear, however, that though the construction of the railway and the various items earlier narrated in connection therewith are to be done by the Secretary of State the ownership thereof is to be that of the assessee-company. Further, under clause 44 it is the assessee-company which is to remain liable for various things enumerated therein and it is required by the said provision to indemnify the Secretary of State against all actions or suits which may be filed in connection with the railway business. Clause 45 restricts the right of the assessee-company to engage in another business without obtaining the permission of the Secretary of State. We must then turn to Schedule II which provides for the application of gross earnings (sub-clause 4) subject to a minimum as provided by sub-clause 5. It is clear from Schedule III that the working agency initially designated by the Secretary of State to manage the work and run the said railway is the Great Indian Peninsular Railway Company.
9. It was submitted by Joshi that it is very clear from the survey of the memorandum of association and the agreements that all that the assessee-company did was to make funds available to the Secretary of State. The construction was done by the Secretary of State and the assessee-company had no control over the same. The rates were fixed under the agreement and the assessee-company could not quarrel with the manner in which the rates, etc., were to be regulated. Under the agreement, the running was to be entrusted to a third party as may be nominated by the Secretary of State and the assessee-company was debarred from interfering with the actual running. Joshi, on behalf of the revenue, emphasised the total lack of control both at the stage of construction as also at the stage of running of the railway and submitted that under these circumstances the assessee-company could not be said to have been engaged in continuous business activity and the true nature of the income would have to be regarded as income from 'other sources'.
10. On the facts of the case, we are not able to agree with Joshi. The assessee-company was 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, not 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.
11. 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.
12. We are fortified in our opinion by a decision of the House of Lords in IRC v. South Behar Railway Co. Ltd.  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 decision at pages 663 and 664 of the report and it is clear that the agreement is substantially similar to the agreement between the assessee-company and the Secretary of State with which we are concerned. As a matter of fact, in South Behar Railway Company's case  12 TC 657 there was a subsequent agreement dated December 11, 1906, by which the amount payable to the assessee-company was fixed at $ 30,000 instead of the varying amounts dependent upon the earnings of the railway as provided under the original agreement. It had been contended on behalf of the company before the House of Lords that South Behar Railway Co. Ltd. had not constructed or maintained or used or worked the Behar Railway and, therefore, is not carrying on business as a railway company or any business at all. In any case, it was contended that since the making of the agreement on December 11, 1906, the sole rights of the company had been and were to be paid the yearly sum of $ 30,000 payable half-yearly by the Secretary of State, or the sum of $ 684,580 if and when the Secretary of State determined the agreement. The Commissioners, it appears, had accepted the submission of the company. Rowlatt J. Expressed the opinion that the company, in the course of its earlier operations, was undoubtedly carrying on a trade or business or under taking of a similar character, but after 1906, it was not. Rowlatt J. Was reversed by the Court of Appeal, Pollock M.R. observing that it was impossible to say that the company was not carrying on any trade or business even after 1906, although its business may be quiscent, and to a large extent, a matter of routine. It was observed that it still remained a company alive, and still requiring, if only in smaller details, the directions of its directors and the duties carried out by its secretary. Two other members of the Court of Appeal agreed with the Master of the Rolls, but Sargant L.J. agreed with the single judge. The South Behar Railway Company appealed against the decision of the Court of Appeal to the House of Lords which concurred with the majority of the Court of Appeal. Viscount Cave L.C. considered the memorandum of association of the company and observed as follows (page 708) :
'My lords, I agree with the Court of Appeal in holding that the finding of the Commissioners is not a finding of pure fact, but is an inference of law founded 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 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 company one must look first at its memorandum and see for what business that provides and whether its objects are still being pursued [Korean Sybdicate's case  12 TC 181:  3 KB 258 (CA). It is common ground that the company when first incorporated and for some years afterwards did carry on a business, or an undertaking of a similar character, for it embarked its very considerable capital in making a railway, and there, as a matter of fact, that capital still remains. That the actual construction and working of the line were by agreement entrusted by the company to third parties, does not effect the matter, for this was merely the way in which the company's business was carried on. Under the contract with the Secretary of State for India, which the company was formed to enter into, the line may be sufficiently, if not exactly, described as a line built with the company's money on land provided by the Secretary of State, and worked for the company by the Secretary's nominees for 45 per cent. Of the gross earning. The residue of the gross earnings belonged to the appellants. Under this system, the profits made by the company in carrying on this business would certainly vary from year to year and may have been precarious, but such as they were they accrued from the company's interest in the working of the line, which its money had built.' We are not concerned with the remaining observations of Lord Sumner which deal with the position after 1906. None of the law lords were in any doubt as to the position prior to 1906 and they were quite clear that originally under the agreement of 1895 the company carried on business and made money out of it. We are concerned with the position prior to that which existed in 1906 in South Behar Railway Company's case  12 TC 657 . The position of the agreement before us in substantially the same as the agreement between the South Behar Railway Company Ltd. And the Secretary of State and the view which we have taken is the same as that taken by the House of Lords. We are not concerned with considering the agreement similar to the one of 1906 between the South Behar Railway Company Ltd. And the Secretary of State.
13. In this view of the matter, it becomes unnecessary to consider the alternative submission of the assessee-company which had found favour with the Tribunal and which is reflected in question No. 2. Accordingly, the questions are answered as follows :
Question No. 1 : In the affirmative and in favour of the assessee Question No. 2 : Unnecessary to answer, in view of the answer given by us to question No. 1.