1. Both these appeals are in respect of the assessment year 1976-77, whereas ST Appeal No. 27 (Cal.) of 1981 is by the assessee and ST Appeal No. 28 (Cal.) of 1981 is by the revenue.
2. The only dispute in the assessee's appeal pertains to the computation of capital for the purpose of determining the chargeable profits.
3. The assessee is a shipping company having its head office in Sweden.
The part of its income is assessable in India in terms of Section 44B of the Income-tax Act, 1961. In the course of the assessment proceedings to surtax question arose as to how the capital of the company for the purpose of the Surtax Act should be computed. The company worked out the capital for purposes of the Surtax Act by taking Indian capital to world capital in the same ratio as Indian income to the world income. Profit as per world profit and loss account was worked out by the assessee at Rs. 83,37,289. Indian income as per income-tax return was Rs. 14,06,940. Income arising outside India thus, came to Rs. 69,30,349. The total world capital of the assessee-ccmpany was Rs. 9,32,68,839. The proportionate part of it being in the ratio of Indian income to world income was worked out by the assessee-company to be Rs. 1,57,39,368 by deducting from the world capital the proportionate part relatable to income arising outside India. The IAC, however, did not accept the above working. He felt that it would be more appropriate for the purpose of determining the Indian capital to go by the ratio between Indian operating revenue and world operating revenue. The Indian operating revenue as per his working was Rs. 1,87,59,210. It worked out to be 3.3177 per cent of the world operating revenue which was Rs. 56,54,15,207. He, therefore, worked out the Indian capital at 3.3177 per cent of the world capital, i.e., at Rs. 29,00,709.
4. On appeal, the Commissioner (Appeals) did not accept the assessee's computation as correct. He consequently upheld the working of the capital of the IAC. While doing so the Commissioner (Appeals) made the following observations: I have considered the arguments of the appellant but do not find these acceptable. Total income as contemplated in rule 4 of the second Schedule of Surtax must bear the same meaning as in the Income-tax Act as defined in Section 2(45). This particular provisions of the Income-tax Act has been expressly incorporated in Surtax Act under Section 2(9). Therefore, the expression 'total income' must be read as having the same meaning as in Income-tax Act Section 2(45). Section 2(45) defines total income as 'total income means the total amount of income referred to in Section 5, computed in the manner laid down in this Act.' This makes it clear that the total amount of income in the case of non-resident has to be considered in the light of Section 5(2) of the Act. Section 5(2) of the Act is specifically applicable to the non-resident like the appellant makes it clear that only income accrued or deemed to have accrued in India and/ or income receiving or deemed to be received in India are to be treated as total income. Therefore, by very definition of total income for the purposes of Surtax Act in the case of non-resident will mean only the Indian income, i.e., Indian income arising or receiving in India and cannot apply to income arising or received outside India. Therefore, rule 4 of the Second Schedule to the Surtax Act has to be interpreted to mean that the Indian income of a non-resident assessee includes certain amounts which are not includible by virtue of any other provisions then the capital has to be computed on the basis of proportionate income.
This means that some amounts which are not included according to certain provisions of the Act but which are otherwise Indian income can only be considered. This rule 4 of the Second Schedule of the Surtax Act does not contemplate an income which is not a part of the total income at all and that will be rendering this rule completely impossible of application because Indian income cannot include world income though world income will necessarily include Indian income.
Section 2(45) and Section 5 are dealing with income arising in India only and, therefore cannot include income outside income (sic) as mentioned already. In this view of the matter I am unable to accept the appellant's contention and held that the IAC was justified in not basing his computation of capital on the world income and Indian income basis. This ground of the appellant, therefore, fails.
5. The aforesaid order of the Commissioner (Appeals) has been assailed by the assessee as erroneous. The learned counsel for the assessee points out that the Legislature has specifically provided as to how capital shall be computed in a case where the entire income of a company is not assessable to tax, and that as such it is not open to either the IAC or the Commissioner (Appeals) to have devised their own way of ascertaining the Indian capital for the purpose of the Surtax Act, 1964. In this connection, our attention is invited to rule 4 of the Companies (Profits) Surtax Act, 1964 ('the Act'), Second Schedule, which reads as follows: 4. Where a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3, diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains.
The learned counsel points out that the sense of rule 4 is clarified by the form of return under the Surtax Act. The said form has been devised according to rule 5 of the Surtax Rules. Item No. 13 of this Form indicates the manner in which the capital is to be computed in those cases where rule 4 of the Second Schedule is operative. It may be extracted at this place, for the sake of convenience, as follows: 13. (a) Amount of income, profits or gains, if any, not includible in the total income as computed under the Income-tax Act, 1961.
(Please see Note 7).
(b) Total amount of income, profits and gains in respect of the previous year(s) [i.e., the aggregate of the amount shown in entry (a) above; and the amount of the total income in respect of the previous year(s) as shown in item 1 of Part II of this return] (c) Amount by which the capital as shown in item 12 is required to be diminished in accordance with rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, i.e., the amount shown in item Note No. 7 given at the foot of the return form gives the instances of incomes, profits and gains not includible in the total income, referred to in rule 4 as follows: Instances of income profits and gains not includible in the total income as computed under the Income-tax Act, 1961 are agricultural income in India, and in the case of a non-resident company, its income accruing or arising outside India.
On the basis of the aforesaid form and Note No. 7, the learned counsel urged that the computation of capital as done by the company was entirely in accordance with the aforesaid return form and rule 4 of the Second Schedule of the Surtax Act, and as such the Commissioner (Appeals) was in error in holding that the computation of the assessee was not correct. On the contrary, the computation of income of the IAC was entirely ad hoc and contrary to the rule and the return form.
Orders of the authorities below, therefore, deserved to be reversed. In support of his stand, the assessee's learned counsel relied on the following authorities also: Stumpp, Schuele & Somappa (P.) Ltd. v.Second ITO [1976] 102 ITR 320 (Kar.), Second ITO v. Stumpp, Schuele & Somappa (P.) Ltd. [1977] 106 ITR 399 (Kar.), Addl. CIT v. Bimetal Bearings Ltd. [1977] 110 ITR 131 (Mad.), CIT v. Century Spg. & Mfg. Co.
Ltd. [1978] 111 ITR 6 (Bom.), CST v. Ballarpur Industries Ltd [1979] 116 ITR 528 (Bom.), Nav Bharat Vanijya Ltd. v. CIT [1980] 123 ITR 865 (Cal.) and CIT v. Schroder Scovill Duncan Ltd. [1981] 132 ITR 822 (Cal.).
On behalf of the revenue, the order of the Commissioner (Appeals) was stoutly supported.
We have carefully examined the rival submissions. It appears to us that there is merit in the assessee's contention that the computation of capital done by the assessee-company is in accordance with rule 4 as illustrated in the return form in Item No. 13 and Note No. 7. The concept of total income as is well known is not co-equal to the commercial concept of income, profits and gains of a company. Some part of income, profits and gains of a company may not be includible in the total income of the company for various reasons as given in Section 5 read with Section 6 and Section 10 of the 1961 Act. Thus, for example, in the case of a company which is non-resident on the basis of the test laid down in Section 6, all those incomes which are received by it outside India or which accrue or arise or are deemed to accrue or arise to him outside India are not includible in his total income in terms of Sub-section (2) of Section 5. Similarly, there are incomes mentioned in Section 10 which though accrue and arise to a company are not includible in its total income. The reasons for non-inclusion may thus be either on account of the operation of Sub-section (2) of Section 5 or the operation of various sub-sections of Section 10. For whatever reason, if the income, profit or gain is not includible in the total income of a company, rule 4 would apply and the computation of capital would have to be done in accordance with the ratio which the income, profits and gains not includible in the total income bear to the total amount of its income, profits and gains. The above meaning of rule 4 is illustrated by Item No. 13 of the form of return and Note No. 7 of the return specifically points out the income earned by non-resident outside India as one of those incomes which are not includible in the total income of the company. The learned Commissioner (Appeals) has apparently omitted to take note of the above Item No. 13 and Note No.7. He has further in our opinion missed the true import of Section 5(2). Sub-section (2) of Section 5 is co-ordinate with various sub-sections of Section 10 in its effect of excluding some of the incomes from the purview of total income. Qualitatively, there is no difference in the exclusion effected by Sub-section (2) of Section 5 and those effected by various sub-sections of Section 10. It appears to us that the Commissioner (Appeals) started with the presumption as if total income is arrived at by computing the income of a company in terms of Section 5 and the exclusions effected by Section 10 come into the picture only after total income is determined in terms of Section 5. The above reading of the section is, however, in our opinion not correct. Both Sub-sections (1) and (2) of Section 5 are 'subject to the provisions of this Act, i.e., Income-tax Act, 1961, and the operation of other Sections of the Act for the purpose of computation of total income is simultaneous. The status of an assessee as determined under Section 6 has certain effect on the inclusion or exclusion of certain incomes, Sub-sections (1) and (2) of Section 5 deal with this aspect of the matter. Section 10 thereafter deals with those exclusions, which would be operative both to the resident and non-resident, unless the context of a particular sub-section of Section 10 indicates to the contrary. The total income is arrived at not at the stage of Section 5, but after all the various provisions of the Act have been given effect to. The concept of 'gross total income' as elaborated in Chapter VI-A of the 1961 Act has, it appears to us, overshadowed the reasoning of the learned Commissioner (Appeals). This would be patent from the following observation made by him: Section 2(45) defines total income as 'total income means the total amount of income referred to in Section 5, computed in the manner laid down in this Act.' This makes it clear that the total amount of income in the case of non-resident has to be considered in the light of Section 5(2) of the Act. Section 5(2) of the Act is specifically applicable to the non-resident like the appellant makes it clear that only income accrued or deemed to have accrued in India and/or income receiving or deemed to be received in India are to be treated as total income. Therefore, by very definition of total income for the purposes of Surtax Act in the case of non-resident will mean only the Indian income, i.e., Indian income arising or receiving in India and cannot apply to income arising or received outside India.
Therefore, rule 4 of the Second Schedule of the Surtax Act has to be interpreted to mean that the Indian income of a non-resident assessee includes certain amounts which are not includible by virtue of any other provisions than the capital has to be computed on the basis of proportionate income. This means that some amounts which are not included according to certain provisions of the Act but which are otherwise Indian income can only be considered.
7. The aforesaid reasoning, if we may say so, with respect, has no relationship whatsoever with the plain language of rule 4. The plain language of rule 4, as we have noticed above, clearly makes a distinction between 'the income, profits and gains of a company' and the 'total income' of a company and visualises the situation, where some of the items, which might otherwise be income, profits and gains of the company may not be includible in the total income for one reason or the other on account of the operation of the statute. The relevant parts of the statute, which exclude certain incomes of a non-resident company from being included in its total income, are contained in Sub-section (2) of Section 5 and, therefore, the interpretation of the Commissioner (Appeals) that only after the Indian income has been ascertained, one should try to look at those items of income which are not includible in the total income and which formed part of such Indian income is not tenable. There is no warrant in the language of the rule to interpret it in such a manner. We have first to look at the 'income, profits and gains' of the company, and then to determine as to which part of it is not includible in the total income. The ratio between the latter and the former has to be applied to determine the sum which will be diminished from the capital of the company as determined in accordance with rules 1, 2 and 3. Accordingly, we hold that the Commissioner's interpretation is erroneous and the computation made by the assessee is entirely in accordance with law. Accordingly, the orders of the authorities below are hereby reversed and the appeal of the assessee is allowed. ' 9. That brings us to the revenue's appeal. The ground raised by the revenue reads as follows: On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals)-II, Calcutta erred in treating the 'Debt Adjustment Fund' of Sw. Kr. 795,000 as reserve for the purpose of computation of capital base.
The Debt Adjustment Fund has been explained by the company as being the product of the Companies Act as obtaining in Sweden. The letter of the company, which has been filed before us, and which we have admitted in evidence, reads as follows: According to Current Swedish Company Act a company is required to allocate from its profit to a Debt Adjustment Fund 10 per cent of the profit for each year....
The Debt Adjustment Fund is, therefore, not a fund or allocation which is meant for meeting any specific liability like taxation or to safeguard against the loss which may arise on account of bad and doubtful debts. It is created under a statute and it, therefore, in our opinion, constitutes 'reserve' and as such it will have to be treated as part of capital in accordance with rule 1 of the Second Schedule.
While taking the above view, we are supported by the ratio of the following decisions of the Supreme Court: First National City Bank v.CIT [1961] 42 ITR 17 and Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559.
The stand of the department being contrary to it, is not acceptable to us. Accordingly, we reject the departmental appeal.