1982 (7) TMI 133 - AT - Income Tax

Summary

Issues Involved:
1. Computation of capital for determining chargeable profits under the Surtax Act.
2. Treatment of the "Debt Adjustment Fund" as a reserve for the purpose of computation of capital base.

Detailed Analysis:

1. Computation of Capital for Determining Chargeable Profits under the Surtax Act:

The primary issue in the assessee's appeal was the method of computing the capital for the purpose of determining chargeable profits under the Surtax Act, 1964. The assessee, a non-resident shipping company, computed its capital by taking the ratio of Indian income to world income. The Income-tax Appellate Commissioner (IAC) disagreed, opting instead to use the ratio of Indian operating revenue to world operating revenue.

The Commissioner (Appeals) upheld the IAC's method, interpreting "total income" as defined in section 2(45) of the Income-tax Act, 1961, which pertains to income accruing or received in India for non-residents. The Commissioner reasoned that the Indian income of a non-resident cannot include income arising outside India, thus supporting the IAC's computation.

The assessee argued that the computation should follow rule 4 of the Second Schedule of the Surtax Act, which states that capital should be diminished by an amount proportional to the income not includible in the total income under the Income-tax Act. The return form under the Surtax Act and Note No. 7, which lists instances of non-includible income such as income accruing outside India for non-residents, supported this interpretation.

The Tribunal found merit in the assessee's argument, emphasizing that the concept of "total income" under the Income-tax Act is distinct from the commercial concept of income. Rule 4 of the Surtax Act clearly distinguishes between "income, profits, and gains" and "total income," and requires the computation of capital to account for non-includible income. The Tribunal concluded that the Commissioner (Appeals) had erred in his interpretation and that the assessee's computation was in accordance with the law. Consequently, the Tribunal reversed the orders of the lower authorities, allowing the assessee's appeal.

2. Treatment of the "Debt Adjustment Fund" as Reserve for Computation of Capital Base:

In the revenue's appeal, the issue was whether the "Debt Adjustment Fund" should be treated as a reserve for the purpose of computing the capital base. The Commissioner (Appeals) had treated the fund as a reserve, which the revenue contested.

The Debt Adjustment Fund was mandated by Swedish law, requiring companies to allocate 10% of their profit to this fund each year. The Tribunal noted that the fund was not meant for specific liabilities like taxation or bad debts but was a statutory requirement. Citing Supreme Court decisions, the Tribunal concluded that the fund constituted a "reserve" and should be included in the capital base under rule 1 of the Second Schedule.

The Tribunal rejected the revenue's appeal, affirming the Commissioner (Appeals)'s treatment of the Debt Adjustment Fund as a reserve.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the computation of capital for the Surtax Act, finding the assessee's method in accordance with rule 4. The Tribunal also dismissed the revenue's appeal, affirming that the Debt Adjustment Fund should be treated as a reserve for capital computation.