The Judgment of the Court was delivered by

Sir John Wallis, Kt., C.J:— This reference raises a question as to the interpretation of a rule made by the Government of Madras under section 43(2)(c) of the Indian Income-tax Act which enables it to

“prescribe the manner in which and the mode by which the taxable income of persons not resident in British India or of persons deemed to be asseesees in respect thereof, shall be arrived at.”

Such persons under section 33 are made liable to be taxed on profits or gains which are deemed to arise or accrue in India. Rule 1 provides that the profits in India for assessment purposes may be calculated on such percentage of the turnover of the business in India as the Collector may consider reasonable. Rule 2, with which we are concerned, is as follows:

“In cases in which the method of assessment on a percentage of turnover is inapplicable—as for example, the case of an Indian Branch of a Foreign Insurance Company—the profits of the Indian Branch may be assumed for Income-tax purposes to bear the same proportion to the total profits of the Company as its receipts bear to the total receipts.”

The question referred to as is whether or not in arriving at the “total profits” for the purposes of the rule, Income-tax and Excess Profits Duty payable in England, and Income-tax payable at stations outside British India, are to be deducted. Mr. Ainger for the appellant, has referred us to Stevens v. Durban-Roodeport Gold Mining Company, and to certain dicta in Scottish, etc., Insurance Company v. New Zealand Land Company, and Rover v. South African Brewerie, which support the proposition that in England when profits arising abroad are liable under the English Income-tax Act to pay Income-tax in England, a deduction is allowed in respect of the income or similar tax levied on such profits in the places where they arose; and if it were a question here of taxing under section 3(1) of the Act profits arising outside British India on the ground that they were received in British India, those authorities would be applicable, but in my opinion they have no application to the present case. What have to be ascertained are the assessable profits arising in British India of the Eastern Extension Australasia and China Telegraph Company, which is incorporated in England and has branches in India and elsewhere. But for the rule in question, those profits would be ascertained by taking the Indian receipts and debiting against them the expenditure necessary to earn, them, and in such a calculation the amount of the tax itself would not be allowed as a deduction. The taxes levied locally on the assessable profits arising in other countries would not enter into the calculation at all. As, however, it would be difficult if not impracticable in the case of a business such as this to ascertain the expenditure properly debitable against the Indian receipts, the Government in the exercise of its statutory powers has provided that the assessable profits of the Indian branch, without deduction of the Indian Income-tax, shall be deemed to bear the same proportion to the total assessable profits of the Company as the Indian receipts bear to the total receipts. As the Indian assessable profits are to be ascertained without deduction of the local Income-tax it must necessarily be the intention of the rule, that the total assessable profits of the business should be arrived at in the same way, viz., without the deduction of the several local Income-taxes, and Excess Profits taxes which are enhanced income-taxes. Otherwise, the whole basis of comparison would be gone; and, as observed in paragraph 5 of the Letter of Reference, the opposite construction would involve holding that the word “profits” was used in two different senses in the same rule. The answer to the Reference must be that the deductions claimed are not allowable.

Costs Rs. 250 to be paid by the assessee to Government.

Oldfield, J.:— I agree. It is no doubt satisfactory that, as my lord has shown, the construction claimed by the Crown corresponds with a reasonable result. But in the circumstances it seems to me, with all due deference, that we need not go beyond the wording of the rule in order to reach our conclusion. It is impossible in accordance with the ordinary canous of construction to give to the word “profits” a different meaning in the two places, in which it occurs; and, as where it occurs first it is used statedly of profits on which the tax has to be, ascertained, that is, of profits before they have been taxed, it must be similarly used where it occurs again and where its meaning is disputed. This entails acceptance of the argument for the Crown, and, as it is not disputed that foreign Super-tax and Income-tax stand on the same footing, an answer to the Reference that the deductions claimed are inadmissible.

Kumaraswami Sastri, J.:— The question referred to us for decision is, whether the Eastern Extension Australasia and China Telegraph Company, Limited, which is incorporated in England and has branches in India and elsewhere is, under section 33 of the Income-tax Act and the rules framed thereunder, entitled to deduct from the assessable profits Excess Profits duty payable in England, and Income-tax payable in England and stations outside British India. section 33 of the Income-tax Act renders persons residing out of British India taxable in respect of profits or gains “accruing or arising to such persons, whether directly or indirectly through or from any business connexion in British India” which, is deemed to be income accruing or arising in British India. As it is not possible to ascertain accurately the profits made in British India of such firms, rules were framed under the statutory power conferred by section 43(2)(c) which enables the Government to frame rules

“prescribing the manner in which and the procedure by which the taxable income of persons not resident in British India or of persons deemed to be assessees in respect thereof, shall be arrived at.”

One of the rules runs as follows:—

“In cases in which the method of assessment on a percentage of turnover is inapplicable—as for example, the case of an Indian Branch of a Foreign Insurance Company—the profits of the Indian Branch may be assumed for purposes of Income-tax to bear the same proportion to the total profits of the Company as its receipts bear to the total receipts.”

The total profits of the Company will be the profits made in British India and also outside British India, and so far as the profits made in India are concerned it is clear that Income-tax paid during the previous year or likely to be assessed during the current year cannot be deducted. Section 9 of the Act, which relates to income derived from business and which provides for the mode in which such income shall be computed, specifies the deductions that can legally be made, and it is clear that Income-tax paid for the previous year cannot be deducted to arrive at an estimate of the profits on which Income-tax is to be assessed.

In Ashton Gas Company v. Attorney General, Lord Halsbury observed:

“Now the profit upon which the Income-tax is charged is what is left after you have paid all the necessary expenses to earn that profit. ‘Profit’ is a plain English word, that is, what is charged with Income-tax. But if you confound what is the necessary expenditure to earn that profit with the Income-tax which is a part of the profit itself one can understand how you get into the confusion which has induced the learned counsel at such very considerable length to point out that this is not a charge on the profits at all. The answer is that it is. The Income-tax is a charge on the profits; the thing that is charged is the profit that is made and you must ascertain what is the profit that is to be made before you deduct the tax. You have no right to deduct the Income-tax before you ascertain what the profit really is.”

These observations have-to be kept in mind in construing the word “profit” in the rule.

The rule in question merely provides the formula for ascertaining the income arising out of the business in British India, which is so mixed up with the income arising out of business carried on outside British India that you cannot estimate it with mathematical accuracy. By the very nature of the case the rule is artificial and provides a rough and ready method of arriving at a taxable income. As there can be no deduction of the Income-tax in arriving at the Indian assessable profits if the Indian income were attempted to be arrived at in the usual way, namely, by taking the Indian receipts and deducting the expenditure necessary for the carrying on of the Indian business having regard to the provisions of section 9 of the Income-tax Act, it seems to me that the word “profit” cannot be used in two senses in the rule, so as to exclude Income-tax where one item of the total, namely, Indian income is concerned, and to include it as regards other items.

The main contention of Mr. Ainger for the Company was that “profit” for the purposes of Income-tax must be the same as commercial profit except to such extent as may be controlled by the Act, that where a Company is assessed in England on profits made both in England and the Colonies a deduction is allowed for foreign Income-tax paid, and that Income-tax paid outside British India stands exactly on the same footing as necessary expenses incurred for the carrying on of the business. He also argues that unless there is something in the Income-tax Act prohibiting the taking into account of Income-tax paid outside British India, the mere fact that it is a deduction not specified in section 9, would make no difference and that in any event it will fall under section 9, clause (ix), as being “expenditure incurred solely for the purpose of earning such profits.” Reference has been made to Stevens v. Durban-Roodeport Gold Mining Company, Scottish etc., Insurance Company v. New Zealand Land Company, Rover v. South African Breweries and to Usher's Wiltshire Brewery Limited v. Bruce.

In Stevens v. Durban-Roodeport Gold Mining Company, the only question that arose for decision was as to how the Imperial tax, which was imposed during the last of the three years on the average profits of which Income-tax was levied, should be treated and it was held that the amount could only be allowed as an outgoing, spread as an average over the three years and not as a deduction from the ascertained profits of the individual year. As it was conceded that the New Imperial Tax “was to come in somehow” the only question was how credit was to be given. This case is no authority when the question, for decision is whether a tax paid outside British India can be taken into consideration in assessing Income-tax in British India. In Scottish, etc., Insurance Company v. New Zealand Land Company, the question was whether the preference share-holders of a Company, registered in the United Kingdom but carrying on business in a Colony, who have received their full dividend are as between themselves and the Company entitled to participate in the allowance granted by the Government under section 43 of the Finance Act, which allows a rebate of 1 shilling 6 pence out of 5 shillings. The answer to the question depends on the construction of section 43 of the Finance Act, 1916. In considering the question whether the Colonial Income-tax can be said to have been paid by the preference share-holders, Lord Fit?lay observed:

“The Colonial Income-tax had to be paid in the Colony and the profits could not be remitted to the United Kingdom without paying it. It stands exactly on the same footing with any expenses necessarily incurred in the business of the Company in the colonies…Payment of the Colonial Income-tax was part of the expense of carrying on the business in Australasia or New Zealand and the profits were necessarily diminished by the amount so paid, just as by any business expenses incurred in the ordinary course.”

There was no question in the case as to how Income-tax was to be assessed, and where the only question was as to who should get the benefit of the rebate, there was no reason why the word “profits” should not be used in the ordinary commercial sense of the sum that remains to be divided after meeting all necessary expenses. On whatever amount you may calculate profits for the purposes of Income-tax, profits, so far as the shareholders are concerned, will always be the sum that remains after deducting the tax paid. In Rover v. South African Breweries the question was similar to that in Scottish, etc., Insurance Company v. New Zealand Land Company referred to above Ashbury, J. observed:

“As regards the share-holders in this country the Colonial tax is not a duty charged within the meaning of section 54, but an outgoing of the Company on the same footing as any other administrative expense in the Colony which has to be satisfied before any profits can be ascertained and distributed by way of dividend.”

The decision of Ashbury, J., that the English Company cannot deduct the full amount of 5 shillings but only the net British Income-tax it has actually borne, was overruled by the House of Lords in the Scottish Insurance Company's case. The decision in Usher's case does not touch the present question. It was held that when a deduction was proper and necessary to be made, in order to ascertain the balance of profits it ought to be allowed provided there is no prohibition in the Income-tax Act or rules against such an allowance.

There can be little doubt that as a matter of accountancy and book-keeping, and as between share-holders entitled to a dividend and the Company, Income-tax paid is always entered as an expense which has to be deducted before the amount divisible as profits can be ascertained, and enters into the debit charges in the same way as any other item of expenditure. It is equally clear that, for the purpose of levying Income-tax you cannot deduct the amount paid or payable as Income-tax on the ground that it is only what remains that goes to the person carrying on the business. The fact that as between the share-holders and the Company you would, estimate profits in a particular way is no ground for estimating profits on which Income-tax has to be calculated in a similar manner.

In enacting the rule in question for the purpose of ascertaining profits in India, I at of opinion that what was intended was that you must take the profits in each centre on which Income-tax was charged or chargeable, total up such profits and estimate the profits in British India by ascertaining the ratio which the total receipts in India bear to the total receipts.

I would answer the question in the negative.

Solicitors for the assessee.— Messrs King and Partridge.

M.H.H