Full Judgment
On the facts and in the circumstances of the case the learned Commissioner (Appeals), Calcutta has erred in holding that the basis of computation of capital base for purposes of surtax assessment should be in proportion ofIndian income Indian operating revenue------------- as against --------------------------World income World operating revenue 3. The appellant is a non-resident shipping company having its head office in Sweden under Section 44B of the Income-tax Act, 1961 ('the Act') the amounts referred to Clauses (i) and (ii) of Sub-section (2) thereof are to be taxed in accordance with the provisions of Sub-section (1) thereof. For the assessment years under consideration, i.e., 1977-78 to 1979-80 it filed surtax returns disclosing chargeable profits at Rs. 10,04,610, Rs. 7,50,009 and Rs. 8,01,757 respectively and claimed statutory deductions at Rs. 1,47,66,367, Rs. 1,21,87,040 and Rs. 1,30,19,523 respectively. The assessee-company claimed that it incurred loss on non-Indian operations and as such the entire world capital of the company should be held to have been invested for operations of Indian business and earning income therefrom. The assessee-company worked out its capital attributable to Indian income in the same proportion as its Indian income bears to its world income following Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. But the ITO did not accept the contention of the assessee-company and worked out the capital attributable to Indian company by adopting the ratio between Indian operating revenue and world operating revenue with reference to its world capital. On appeal, the Commissioner (Appeals) directed the ITO to accept the computation made by the assessee-company on the basis of Rule 4 of the Second Schedule. Being aggrieved the department preferred these appeals.
4. It was contended by the departmental representative that the Commissioner (Appeals) was not justified in directing that the capital attributable to Indian income of the assessee-company should be determined in the same proportion as its Indian income bears to its world income. He contended that the Surtax Officer was correct in computing the capital. This contention was opposed by the authorised representative who contended that the Commissioner (Appeals) was correct in his conclusion.
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.
6. From the above, it is apparent that Rule 4 laying down the computation of capital comes into play only '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.' Rule 4 shall, therefore, not come into play when this condition, namely, a part of the income, profits and gains of a company is not includible in its total income as computed under the Act is not fulfilled. Sections 44B was introduced with effect from 1-4-1976. By this, Sections 28 to 43A of the Act were made inapplicable to the case of a non-resident engaged in the business of operation of ships and 71/2 per cent of the aggregate of the amounts specified in Sub-section (2) thereof was to be taken as profits and gains of such business chargeable to tax under the head 'Profits and gains of business or profession'. So on the introduction of this Section 44B with effect from 1-4-1976 the income, profits and gains of a non-resident shipping company was no longer computed after excluding part of its income, etc,, in accordance with the Act. As such, the condition for applying Rule 4 for computation of capital was no longer applicable with effect from 1-4-1976. Therefore, the Commissioner (Appeals) was not justified in holding that the computation of capital was to be made on the basis of Rule 4. In our opinion, computation of capital has to be made on the basis of the other rules, namely, rules 1 to 3 of the Second Schedule whichever is applicable but Rule 4 cannot be resorted to for determining the capital of a non-resident shipping company whose profits and gains of business are determined in accordance with the provisions of Section 44B. We direct the Surtax Officer to recompute the capital in accordance with the above direction and consequent surtax, if any, payable by the assessee.
7. It was sought to be contended by the departmental representative that if this method of computation as directed by us is followed, the revenue will be in a position worse than that in which it was before filing of the appeal. We are not impressed by this argument for the following two reasons. Firstly, it has not been shown to our satisfaction that by our order the revenue will be in a more disadvantageous position than that it was in before filing of the appeal. Secondly, according to the decision of the Supreme Court it is our duty to correct all the errors in the proceeding under appeal. This is evident from the following principle of law laid down by the Supreme Court in the case of Kapurchand Shrimal v. CIT [1981] 131 ITR 451 : ... It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh unless forbidden from doing so by the statute ....(p. 460) 8. For the above reasons we set aside the order of the Commissioner (Appeals) but for different reasons.