Alfred Henry Lionel Leach, C.J.
1. This reference raises in a different setting the same question which was decided by this Court in the Commissioner of Income-tax, Madras v. M. & S.M. Railway Co., Ltd. (1940) 3 M.L.J. 110 : I.L.R. (1940) Mad. 889 Since that case was decided, certain alterations have been made in the contract between the Secretary of State and the company and it is said that the alterations have the effect of relieving the company from the liability to pay income-tax in India on the sum of Rs. 23,33,333. Admittedly the contract was amended with this object in view. If by the amending contract the company can escape this liability it is entitled to make the amendment and the Court has only to decide whether this object has been achieved. The Income-tax Appellate Tribunal, Calcutta Bench, has held that the object has not been achieved, but at the request of the company it has referred for the decision of this Court the following question:
Whether the sum of Rs. 23,33,333 guaranteed interest on the capital of the applicant company deposited with the Secretary of State for India received in England was rightly assessed as the income of the applicant?
2. In order to understand the nature of the amendments which have been made in the contract it is necessary to set out certain facts. All the assets of the M. &, S. M, Railway Company are the property of the Secretary of State. The company manages the undertaking tinder the supervision and control of the Secretary of State. Both the Secretary of State and the company have contributed to the capital of the undertaking. The Secretary of State's share of the capital is 12,750,000 and the company's share is 5,000,000. The Secretary of State guarantees interest on the company's capital at the rate of 3 1/2 per cent, per annum and the figure of Rs. 23,33,333 represent!; the sum required to pay this interest. As pointed out in the judgment in the previous case all monies received by the company in the course of the working of the undertaking are paid over to the Secretary of State. The company is not entitled to use any of the receipts for the purposes of meeting working expenses. These expenses are met from a grant made each year by the Secretary of State.
3. The contract between the Secretary of State and the company before its recent amendment provided that the monies received in each half year should be applied in the following order: (1) In or towards the discharge of expenditure attributable to the half year to which the receipts related; (2) in or towards the discharge of expenditure attributable to any previous half year or half years and not already discharged out of receipts on account of revenue; (3) in payment of interest on debentures; and (4) in payment to the Secretary of State of the amount paid by him to the company in respect of the guaranteed interest on the company's capital. The surplus was to be divided between the Secretary of State and the company in proportion to their respective contributions to the capital, exclusive of debenture capital.
4. In the previous case the question was whether the sum received by the company from the Secretary of State on account of interest on its capital represented profits made in India. The Court held that it did. The payment to the company really meant payment in anticipation of profits and the Secretary of State was to recoup himself out: of the profits when they were made.
5. The contract, as now amended, provides that the receipts shall be applied,
1. Primarily in or towards the discharge of expenditure attributable to the half year to which the receipts relate,
2. Secondarily in or towards the discharge of expenditure attributable to any previous half year or half years and not already discharged out of receipts on account of revenue. The further application of receipts provided for by this clause shall be subject to the payment to the South Indian Railway Company, Limited, mentioned in clause Provisional No. 55-c (1) hereof, and also to the payment to that company and to the Krishna District Board, respectively, of the rebates referred to in clause Provisional No. 55-c (2) hereof respectively.
3. In the next place in repayment in rupees to the Secretary of State of the equivalent of such interest for the half year to which the receipts relate as shall have been paid or shall be payable by the Secretary of State to the company in respect of the company's debentures and debenture stock which shall have been issued with the sanction of the Secretary of State for the purpose of capital expenditure on the company's and state lines and which shall for the time being be outstanding.
4. In the next place in repayment in rupees to the Secretary of State of the equivalent of such interest for the half year to which the receipts relate as shall have been paid by the Secretary of State in respect of interest at the rate of 3 1/2 per cent, per annum on the nominal amount of the capital stock of the company, under clause 15 of the contract of 1908. Provided that if the monies out of which the repayment mentioned in this sub-clause is to be made are insufficient to make the said repayment the deficiency shall be made good out of the monies received on account of revenue in the other half of the financial year of which the said half year forms part. Provided also that if the monies out of which the repayment mentioned in this sub-clause is to be made are in any financial year insufficient to make the repayment of the said amount advanced by the Secretary of State in respect of such financial year the deficiency shall not be made good out of the monies received on account of revenue in any subsequent year.
5. In the next place in payment in rupees to the Secretary of State of interest at the rate of 3 1/2 per cent, per annum or at such other rate as from time to time shall have been agreed upon in the case of further advances made subsequent to the 31st December, 1937, 'under the contract of 1908 on the capital advanced by him expressed in rupees for the purpose of capital expenditure on the company's and state lines which shall consist, (a) of the sum of Rs. 16,87,50,000, being the equivalent:. of 12,750,000 (the amount of the capital of the Secretary of State mentioned in Clause (8) of the contract of 1908 as amended by the contract of 1911 only) less 1,500,000 (the amount repaid to the Secretary of State) converted into rupees at the rate of fifteen rupees to this pound sterling (b) of all advances made by the Secretary of State after the 31st December, 1907, and before the 1st January 1938; (c) of any further advances which shall be made subsequent to the 31st December, 1937, under the contract of 1908:
Provided always that for the purposes of this sub-clause other than section (1) thereof any sterling capital which shall have been advanced by the Secretary of State shall be converted into rupees at such rate as was at the date of the advance applicable under the existing contracts for the conversion of sterling payments into rupees.
Provided also that the abovementioned interest shall be calculated for each calendar month on the capital advanced as aforesaid and outstanding at the commencement of each such month and if the amount of such capital outstanding at the end of each month exceeds the amount of such capital outstanding at the commencement of each such month there shall be added to or if the latter amount exceeds the former amount there shall be subtracted from the interest calculated as aforesaid one half of a sum equal to the interest on the difference between the Said amounts at the rate for the same month.6. In the next place in providing for such other debits as it may be agreed should be charged against such receipts.
7. The surpluses or surplus and deficit for the half years in any financial year shall be combined. The resulting surplus if any shall be divided between the company and the Secretary of State in the following manner, that is to say: In payment to the company of one-tenth of the first Rs. 75 lakhs of the said sum. One-twentieth of the next Rs. 15 lakhs. One-thirtieth of the excess, if any, over the first 90 lakhs. The balance shall be retained by the Secretary of State.
6. In our judgment the amendments in the contract do not make any real difference in the position. As before the company is paid its guaranteed interest by the Secretary of State, who reimburses himself out of the monies received in the course of the working of the railway. The changes introduced by the amendments have no further significance than to alter the stage at which the recoupment is to be shown in the accounts. Originally out of the gross revenue receipts, the working expenses and the interest on debentures were first to be deducted. Then the Secretary of State deducted and retained the guaranteed interest which he had paid to the company in advance. The surplus was thereafter divided between the Secretary of State and the company in the proportions fixed. As the result of the amendment of the contract the surplus is arrived at after providing for the payment of charges enumerated under six heads which include the amount paid by the Secretary of State by way of guaranteed interest. What remains is then divided on a basis which differs in some respects from the old basis; but this does not affect the question. No special significance can be attached to the word 'surplus' and we fail to see how the difference in the method of account keeping affects the legal position, so long as the guaranteed interest paid in advance by the Secretary of State is recouped out of the earnings of the railway. The payment still remains a provisional payment which the Secretary of State recovers out of the profits made in British India. In the words of Rowlatt, J., in the M. & S.M. Railway Co., Ltd. v. Commissioners of Inland Revenue (1940) 3 M.L.J.110 : L.R. (1940) Mad 889 (S.B.) it is only ' a distribution of profits in recoupment of a guarantor who guaranteed those profits.' What the position would be, if the profits fell below the level necessary to enable the Secretary of State to recoup himself, still does not fall to be considered.
7. It follows that we agree with the Tribunal that the present case is governed by the decision in the previous case and consequently we answer the question referred in the affirmative.
8. As the reference has been answered against the company it must pay the costs of the Commissioner of Income-tax which we fix at Rs. 250.