1991 (4) TMI 167 - AT - Income Tax

Summary

Issues Involved:

1. Deduction of foreign tax paid under Rule 2(ii) of the First Schedule of the Companies (Profits) Surtax Act, 1964.
2. Treatment of contractors tax paid in Iran.
3. Inclusion of retention money in the capital employed for surtax purposes.

Issue-wise Detailed Analysis:

1. Deduction of Foreign Tax Paid Under Rule 2(ii):

The primary dispute revolves around the quantification of the deduction of foreign tax paid under Rule 2(ii) of the First Schedule of the Companies (Profits) Surtax Act, 1964. The assessee argued that the entire amount of tax paid in Libya (Rs. 1,05,93,946) should be deductible. The Department contended that only a proportionate amount of the foreign tax, corresponding to the income taxed both in Libya and India, should be deductible.

The Tribunal preferred the assessee's interpretation, emphasizing that Rule 2(ii) refers to any portion of the foreign income included in the total income computed under the Indian Income-tax Act. The Tribunal concluded that the whole amount of tax paid in Libya should be deductible under Rule 2(ii), rejecting the Department's approach of proportionate deduction based on doubly taxed income.

2. Treatment of Contractors Tax Paid in Iran:

The assessee contended that the contractors tax paid in Iran, calculated as a percentage of total receipts, should be considered a tax on income and thus deductible under Rule 2(ii). The CIT(A) had held that this tax was not levied in respect of income, profits, or gains, and directed the Income-tax Officer to exclude it from the deduction computation.

The Tribunal upheld the CIT(A)'s decision, stating that the contractors tax in Iran was an additional tax on gross receipts, not a substitute for income tax. The Tribunal noted that this tax did not form part of the total income computed for income-tax purposes in India, and therefore, it could not be considered for deduction under Rule 2(ii).

3. Inclusion of Retention Money in the Capital Employed:

The assessee argued that the retention money, although not credited in the accounts, should be considered part of the capital employed for surtax purposes. The assessee claimed that the post-tax portion of the retention amounts should be regarded as part of the capital, as they are amounts receivable by the assessee.

The Tribunal rejected this contention, agreeing with the Department that the Second Schedule of the Companies (Profits) Surtax Act, 1964, is a complete code for quantifying capital. The Tribunal emphasized that only specific items as per the balance sheet drawn up in the form prescribed under the Companies Act, 1956, should be considered. The Tribunal found no provision for adjusting amounts not disclosed in the balance sheet, and therefore, the retention money could not be included in the capital employed.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the deduction of the entire foreign tax paid in Libya under Rule 2(ii) and dismissed the Department's appeal on this point. The Tribunal rejected the assessee's contentions regarding the contractors tax paid in Iran and the inclusion of retention money in the capital employed, thereby partly allowing the assessee's appeal and dismissing the Department's appeal.