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TMI Blog1982 (7) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. 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-company 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 79] 116 ITR 528 (Bom.), Nav Bharat Vanijya Ltd. v. CIT [1980] 123 ITR 865 (Cal.) and CIT v. Schrader 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 income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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