Derbyshire, C.J:— This matter comes to us by way of reference from the Commissioner of Income-Tax, Bengal, under Section 66(2) of the Indian Income Tax Act (XI of 1922) and it is in the matter of the Ahmadpur Katwa Railway Co., Ltd., and the Katakhal Lalabazar Railway Co., Ltd. An assessment was made upon these companies for Income-Tax for the year 1933-34 and Messrs. McLeod & Co., who are the Managing Agents of five Light Railways, the Ahmadpur Katwa Railway Co., Ltd., the Katakhal Lalabazar Railway Co., Ltd., the Bankura Damodar River Railway Co., Ltd., the Kalighat Falta Railway Co., Ltd., and the Burdwan-Katwa Railway Co., Ltd., have asked for a case to be stated under the abovementioned section. The appeals in all the five cases were heard together and one joint order was passed. By common consent of the parties two railways were taken as typical of the five the Ahmadpur Katwa Railway Co., Ltd., and the Katakhal Lalabazar Co., Ltd.

2. 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 banding 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 abovewritten indenture 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.

If in any year during the continuance of this contract commencing from the first half-year after the close of the period during which interest is payable out of capital under Clause 4 of this schedule whether interest under the said Clause is paid or not:—

(i) the net receipts of the company 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 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.

(ii) the net receipts of the company do not amount to a sum sufficient to pay interest as aforesaid at the rate of 5 per cent, per annum the whole of such net receipts shall belong to and be paid to the company;” and

(iii) and this is the crucial Clause—“the net receipts of the company shall not be sufficient to pay interest on the paid up capital of the company at the rate of per cent, per annum the Secretary of State will pay to the company in addition to the net receipts of the company for such year such a sum as shall with the said net receipts make up an amount equal to interest for such year at the rate of 3½ per cent, per annum on the share capital of the company for the time being paid up provided always that the Secretary of State shall be at liberty to apply any moneys payable to the company under this clause to any of the purposes for which the company are under this contract bound to provide the funds, in case there shall be no capital money in the Government Treasury at the time available and also to deduct from any such moneys all moneys (if any) which shall for the time being be owing to the Secretary of State by the company under this contract and which the company ought to have paid, but shall have failed to pay into any Government Treasury in India. All moneys so retained and applied or deducted shall be afterwards recouped to the company out of capital as soon as the same shall have been paid into Government Treasury”.

3. In the case Of the second company, the Katakhal Lalabazar Railway Co., Ltd., the general provisions are, as far as they are material, substantially the same. There is this clause in Schedule II, Clause 4, headed, Guarantee. 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 maybe 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 of the company for any year do not amount to a sum sufficient to pay interest as aforesaid at the rate of 5 per cent, per annum the whole of such net receipts shall belong to and be paid to the company.

(c) If in year any during the continuance of this Contract commencing from the first half-year after the close of the period during which interest is payable out of capital under Clause 5 of this schedule whether interest under the said clause is paid or not the net receipts of the company shall not be sufficient to pay interest on the paid-up share capital of the company at the rate of 3½ per cent, per annum the Secretary of State will pay to the company in addition to the net receipts of the company for such year such a sum as shall with the said net receipt make up an amount equal to interest for such year at the rate of 3½ per cent, per annum on the share capital of the company for the time being paid-up:

Provided always that the Secretary of State shall be at liberty to apply any moneys payable to the company under this clause to any of the purposes for which the company are under this Contract bound to provide the funds, in case there shall be no capital money in the Government Treasury at the time available, and also to deduct from any such moneys all moneys (if any) which shall for the time being be owing to the Secretary of State by the company under this contract and which the company ought to have paid, but shall have failed to pay into any Government Treasury in India. All moneys so retained and applied or deducted shall be afterwards recouped to the company out of capital as soon as the same shall have been paid into the Government Treasury.

4. Then follows this clause:—

(d) If in any year during the ten years commencing from the first half-year mentioned in the foregoing Clause 4(c) the net receipts of the company shall not be sufficient to pay interest on the paid-up share capital of the company at the rate of 4½ per cent, per annum the Secretary of State will pay to the company in addition to the sum if any, paid by him under the aforesaid clause a further sum out off the revenues of the Assam Administration which shall with the said net receipts and the said sums paid by the Secretary of State under the aforesaid clause make up an amount equal to interest for such year at the rate of 4£ per cent, per annum on the share capital of the company for the time being paid-up.”

5. 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.

6. 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 per cent, per annum on the share capital of the company for the time being paid-up, after the close of the period during which interest is 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.”

7. 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.

8. During the Income-Tax year 1933-34 the two typical companies made profits and received subsidies from the Government as follows:— The Ahmadpur Katwa Railway Co., Ltd., had adjusted profits as per account exclusive of the State subsidy of Rs. 5,277-8-6, the State subsidy was received by the company amounting to Rs. 55,062-7-6, so that the total sum received into the coffers of the company and available for dividend before any deduction for tax was made was Rs. 60,340. For the same year the Katakhal Lalabazar Railway Co., Ltd., had an adjusted loss as per account excluding the State subsidy of Rs. 6,436-13-3, it received a State subsidy of Rs. 40,536-5-3 and its total income available for payment of dividend before Income-Tax was deducted was Rs. 40,099. The State subsidies so paid were according to Government in accordance with the terms of the agreement which hud reference to subsidies.

9. Then the following position arose: the Income-Tax authorities purported to assess the companies to Income-Tax under the Income Tax Act upon not only the earnings of the company in the case of the Ahmadpur Katwa Railway Co., Ltd., but also upon the State subsidy received. Also in the case of the Katakhal Lalabazar Railway Co., Ltd., they purported to assess the Railway Company upon the total State subsidy which was received after deducting the losses. The Railway Companies thereupon contended that they were not assessable in respect of those State subsidies, contending that those State subsidies were, in effect, payments made by the State under its contracts with the several companies made for the purpose of distributing interest or dividend to the shareholders at the rate of 3½ per cent. The companies contended that if Income-Tax were deducted in the way that had been claimed by the revenue authorities it would be something that was contrary to the Income Tax Act and contrary to the contracts between the parties.

10. As regards the moneys paid as subsidy by the Government to the companies, are those moneys assessable as income? “Income” is not specifically defined in the Income Tax Act. The word “income “, is used along with two other words “profits” or “gains” and it may be that those words are explanatory of the word “income. On the whole, I take the view that the word “Income” in this particular case means moneys which are in the coffers of the company and are available in the same way as earnings for the purpose 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 Bailway Co. v. Wyatt which is reported in Tax Cases Vol. 2, p. 584. In that case the company constructed a Railway in Hyderabad. The Nizam's Government guaranteed an annuity for 26 years of 5 per cent, on the issued share and debenture capitail. The purpose of that annuity 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 of Nizam and the company is set out at page 585 of the report and it is Article 25. The account of the extract reads as follows:— “By Article 25 of the said agreement the Goverment of His Highness the Nizam agreed for the period of 20 years to pay the appellant company an annuity equal to £ 5 per cent, per annum on the issued capital of the appellant company, both share and debenture not exceeding £ 4,500,000, the appellant company being bound to apply the same in payment of interest at 5 per cent, per annum on the paid up share capital in payment of the debenture interest at 4 per cent, and in providing a sinking fund for the reduction or redemption of capital as in the said agreement and in the next paragraph hereof is mentioned.” The provisions for a sinking fund are not, in my view, relevant to this case. It was contended that that annuity was not chargeable with duty. The Court of Appeal held that it was, and I think the substance of the Court of Appeal's decision is given in the judgment of Baron Pollock at page 590 in the following words:

“It seems to have been almost idem per idem with what took place in the case which Mr. Kennedy handed up to us yesterday of Blake v. The Imperial Brazilian Bailway Company, and for my part I entirely endorse what was said by my brother Day in that case that this money is in every sense of the term income. It is true it is not spent as Mr. Justice Day said, by the company themselves or divided amongst their shareholders simply as interest or otherwise. When once the thing is ascertained as being subject to Income-Tax it matters not what is done with it afterwards. When once it has come within the grasp of the Income Tax Acts, it is liable to Income-Tax whatever may be its destination or whatever use it may be put to.”

11. In my view that passage from the judgment that I have cited governs the decision in this case. Here, in the case of the Ahmadpur Katwa Railway Co., Ltd., it was provided that “if the net receipts of the company shall not be sufficient to pay interest on the paid up share capital of the company at the rate of 3½ per cent per annum, the Secretary of State will pay to the company in addition to the net receipts of the company for such year such a sum as shall with the said net receipts make up an amount equal to interest for such year at the 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 spite of the fact that it was intended to be paid automatically to the shareholders.

12. Similar provision applies in the other case and a similar result follows.

13. 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.

14. 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 that the “guaranteed interest” payable to the shareholders is not deductible under Section 10(2)(iii) of the Income Tax Act.

15. The third question was “whether the profits earned by the company independent of the State subsidy are, in the circumstances of the case, taxable or not as the company's profits.” As regards this question too Mr. Pugh did not seriously contend that the company's profits earned independently of State subsidy were not taxable. The answer is clearly, in my view, in the affirmative.

16. It has been contended by Mr. Pugh that hardship falls upon the shareholders in this case who have subscribed their money for shares in these companies under the impression created by the Prospectus that they would be entitled to 3| per cent. Whereas, in fact, they got less by reason of a deduction for income tax. That may be a hardship or it may not, according to the income of the shareholders and according to the amount of tax that is being deducted. Mr. Pugh further contends that there was a very real hardship in these cases because the Revenue authorities had begun to assess the companies for super-tax and that diminished the amount of money that was available for distribution to the shareholders over and above what was deducted for Income-Tax. As far as one can see that is a hardship upon the shareholders which the ordinary shareholders could scarcely be expected to realise or contemplate when they subscribed their money for the shares.

17. There is a power in Section 60 of the Income Tax Act which reads as follows:— The Governor-General in Council may, by notification ip the Gazette of India, make an exemption, reduction in rate or other modification, in respect of income tax in favour of any class of income, or in regard to the whole or any part of the income of any class of persons.”

18. It may be, I don't know, it is not for me to say, but it may be, that relief can be given to the shareholders in respect of an unexpected impost of taxation under that particular section.

19. The assesses must pay to the Commissioner of Income tax the fees actually paid to his counsel plus a sum of seven gold mohurs as costs of this reference.

Costello, J.:— When this matter was before the Commissioner of Income-Tax it was argued that the State subsidy was not taxable in the hands of the company because it was paid by the Secretary of 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 shareholders 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 Llanharran Colliery Company, Ex Parte Jegon, (12 Chancery Division, page 533). 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, on the paid-up capital; such money to be repaid to him in a certain event. The company was formed, and the contract was recited and adopted in the Articles of Association. The profits not being sufficient to pay 5 per cent., Jegon paid a sum of money to the Directors for distribution among the share holders to make up the deficiency in pursuance of his contract. After the last payment became due, but before it was paid the company was wound up voluntarily, and Jegon paid to the share holders the amount necessary to bring the last dividend up to £5 per cent. The liquidator claimed the money as part of the assets of the company but it was held that the money due from Jegon under this guarantee was properly payable to the share holders, and was not part of the assets of the company. It is to be borne in mind that this case arose in connection with the winding up of the company in question and it would appear that the money finally paid by Jegon was definitely ear-marked for the purpose of payment of the share holders direct. In my opinion, therefore, it is not surprising in the circumstances that it was held that the money provided by Jegon was no part of the assets of the company. The decision in this case, I think, is no authority at all in the circumstances for the proposition advanced by Mr. Pugh because there is nothing to indicate that had the question arisen during the life-time of ‘The company as to whether or not the moneys paid by Jegon to the company for the purpose of providing dividends to the shareholders were taxable, it would not have been held that the moneys provided by Jegon were part of the assets of the company for the purposes of the Income Tax Acts.

20. In my opinion, it is quite clear that the moneys provided by the Secretary of State in the present instance should properly be described and treated as “income” of the company. I agree with what my Lord the Chief Justice has said upon this point and I think that the matter is covered and indeed is concluded by the two cases reported in 2 Tax Cases, namely, Blake v. Imperial Brazilian Railway at page 58 and Nizam's Guaranteed State Bailway Co. v. Wyatt at page 584. To those two authorities I would add one more, a case which, in my opinion, is directly in point in connection with the question which we now have to decide. It is the case of Pretoria Petersburg Bailway Company Limited v. Elgood [98 Law Times Reports, page 741]. The head note of that case is as follows: —“On the 2nd November, 1895, the South African Republic granted H.J.S a concession for the construction of a Railway and the South African Republic guaranteed to a company which was formed to take over the Railway interest at 4 per cent, on its share capital. On the 11th October, 1899, war having broken out, the line was seized and worked by the British military authorities until the end of the War. On the 18th February, 1902, the British Government gave notice to expropriate the Railway under the terms of the concession. They recognised the validity of the concession and admitted liability to pay all arrears of interest. They paid £97,506.16s. lid as guaranteed interest on share capital at 4 per cent, per annum from the 1st January, 1899 to the 14th November, 1908 “in addition to the other payments on the expropriation”, and it was held by the Court of Appeal (the judgment being given by Lord Justice Fletcher Moulton) “That the sum of £97,506.16s. lid. was not part of a sum paid by the British Government as the gross revenue of the company earned as a trading company from the 1st January, 1901, to the 14th November, 1903, and that after deducting certain expenses incurred by the company during the same period, the benefit of the three years’ average must be applied and income tax was payable on one-third of the balance only”. The importance of this case is that it shows that the amount paid by the British Government in order to make up for the loss of the subsidy which but for the war the South African Republic would have paid to the Railway Company was in the nature of “income” received by the Railway Company and was, therefore, properly chargeable to income tax. The other two points raised in the case put before the Court by the Commissioner of Income-Tax were not seriously argued by Mr, Pugh and it is not necessary that anything should be said with regard to them.

21. I agree that the first question must be answered in the affirmative.

Reference answered accordingly.