T6 FEDERAL REPORTER.
with equal propriety, seek to offset its whole funded debt against its
income.
It is diihcult to understand upon what theory the company assumes
the right to charge against income items for interest, some of which
has not been paid, and all of which has been discharged to the com-
pany by the agreement of the holders of the incumbrances. The com-
pany has assumed to charge against the income account the differ-
ence between the rate of interest which the first mortgage bondhold-
ers agreed to acceptfor six years and the original rate to which they
would have been entitled if the agreement had not been made. The
terms of the agreement are so plain that it does not seem possible to
misconceive its effect, which was, as was intended, to substitute a re-
` duced rate for the original rate for six years, unless a surplus should
arise after the payment of the interest on the income bonds. When
the holders of the first mortgage bonds received the income bonds the
agreement was fully executed. In the face of this agreement the com-
pany undertakes to charge against income, not only the difference be-
tween the original and the reduced rate which it has paid to the bond-
holders for the last two of the six years, but also the difference for the
iirst four years, which has not been paid, but has been funded, and
is now represented by the income bonds.
It has been suggested for the company in the argument of its coun-
sel that sanction is found for the position of the company in an adju-
· dication in the suit between the company and the Union Trust Com-
pany, in the circuit court of the United States for the district of Kan-
sas; but it is not apparent from the record in that case that any such
question as is now presented was directly or indirectly in issue, or
was considered by the court. O
It is also insisted for the railway company that it can properly
charge against earnings the sums required to be set apart annually
for a sinking fund under the provisions of the first mortgage; that
the company is in arrears nearly $2,500,000 in its appropriation for
this sinking fund; and that, deducting this amount from its gross
earnings, there is no net income applicable to inte1·est on the bonds.
This mortgage has not been put in evidence, but, assuming its pro-
visions to be as stated in the brief of counsel, the sufficient answer
to the contention is that the obligation of the company to the income
bondholders is in explicit terms to appropriate all its earnings to the
payment of interest upon the income bonds except such as are to be
devoted to the expenses of operating and keeping in repair its rail-
_ way and mortgaged property, and to the payment of the interest on
the prior incumbrances. Disallowing the items which have thus been
improperly charged against the income account, there is apparently
a considerable sum arising from net earnings which should be applied
to the payment of the interest on the income bonds.
It remains to consider the principles upon which the accounting
should proceed, and this involves an interpretation of the income