Case: South Behar Railway Company Ltd v Commissioners of Inland Revenue [1925] AC 476
Outcome: distinguished
In face of these views expressed by highly respected judges, the applicant cites the decision of the House of Lords in South Behar Railway Company Ltd v Commissioners of Inland Revenue [1925] AC 476. That case concerned a taxpayer company incorporated in order to enter into a contract with the Secretary of State for India for the construction of a railway in that country. The company was to supply the Secretary of State with the necessary funds and materials. The Secretary of State was to provide, free of cost, the land required for the railway, of which the company was to retain possession during the continuance of the contract. The Secretary of State was also to construct the railway, using such agency as he should appoint, and according to his design and specifications, but at the entire risk and cost of the company. From the opening of the railway until the determination of the contract, the Secretary of State was to work and maintain it and keep it supplied with rolling stock, plant and machinery. In each half-year he was to retain 45% of the gross earnings of the railway and remit the remaining 55% to the company. The company could not, during the continuance of the contract, without the written approval of the Secretary of State, engage in, carry on, or apply capital to any other business. The Secretary of State might determine the contract on twelve months' notice, given either on 30 June 1919 or on 30 June in the last year of any subsequent period of ten years. Thereupon the company was to give up to the Secretary of State all land, buildings, stores and other things which were to become the absolute property of the Secretary of State. The Secretary of State was to pay to the company, out of the revenues of India, such sum as, when added to any unspent capital, should amount to the total paid-up capital of the company, so far as such capital had been expended on the undertaking with the authorization of the Secretary of State. 32 The railway was constructed and opened. Although the original agreement remained in place, a further agreement was made on 11 December 1906. By it the company agreed that until determination of the contract, the Secretary of State should be entitled to hold and deal with the railway for his own benefit, without any interference or control by the company, and that he should be under no obligation to work the railway. As and from that date, and until determination of the contract, the Secretary of State was to pay a lump sum to the company by half-yearly payments. Amounts otherwise payable pursuant to the original contract ceased to be payable. It was also agreed that upon determination of the contract by notice of purchase the sum of &#8356;684,580 should be the sum payable in respect of capital expended on the undertaking. 33 Following the 1906 agreement, the company ceased to maintain an office in India. It maintained an office in England, with three directors and a secretary in that country. They received the annuity of &#8356;30,000 payable half-yearly and, after paying interest on the company's debentures, held meetings and declared dividends in the ordinary way. The company, in 1925, had &#8356;6,000 in a war loan but no other investments (apart from the railway). 39 The cases cited in Dagnall and the reasons of Wright J do not support that proposition, even in the bankruptcy context. The rule is rather that, under bankruptcy legislation then in force, trading debts were recoverable in bankruptcy after trading had ceased. In Australia two eminent judges have doubted the wisdom of applying that proposition in the tax context, and a third (Brennan J) appears to have had a similar view. In England another eminent judge has expressed similar reservations. The decision in South Behar Railway cannot be interpreted as an endorsement of the wider application of the decision in Dagnall . Only one member of the House of Lords referred to it, and in a qualified way. Decisions in the Australian Taxation Board of Review can hardly be set against the views of the judges to whom I have referred. The observation in the Canadian case is not persuasive. In the circumstances I decline to follow Dagnall for present purposes.