SUHAS CHANDRA SEN J. - (1.) THE following question of law has been referred by the Tribunal under section 256(1) of the Income -tax Act, 1961 : 'Whether, on the facts and in the circumstances of the case and on a correct interpretation of rule 4 of the Second to the Companies (Profits) Surtax Act, 1964, the Tribunal was justified in holding that the capital of the non -resident assessee company should be determined with reference to its income instead of its operating revenue ?' The facts as narrated by the Tribunal are as under :
(2.) THE assessee is a shipping company, having its head office in Sweden. Part of its income is assessable in India in terms of section 44B of the Income -tax Act, 1961. In the course of assessment proceedings to surtax, a question arose as to how the capital of the company for the purposes of the Surtax Act should be computed. The company worked out the capital for purpose of the Surtax Act by taking Indian capital to world 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 the income -tax return was Rs. 14,06,948. Income arising outside India thus came to Rs. 69,30,349. The total world capital of the assessee -company was Rs. 9,32,65,839. 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 Inspecting Assistant commissioner, 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 to 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% of the world operating revenue which was Rs. 56,54,15,267. He, therefore, worked out the Indian capital at 3.3177% of the world capital, i.e., at Rs. 29,00,709. The appeal preferred by the assessee was dismissed by the Commissioner of Income -tax (Appeals). A further appeal was made to the Tribunal. The Tribunal held that 'there is merit in the assessees contention that the computation of capital done by the assessee -company is in accordance with rule 4 of the Second Schedule, as illustrated in the return form in Item No. 13 and Note No. 17'. They pointed out that '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 sections 6 and 10. Thus, fir example, in the case of a company which is non -resident on the basis of test laid down in section 6 of the Income -tax Act, 1961, all these incomes which are received by it outside India or which accrues or arises 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 subsections of section 10. For whatever reasons, if the income, profits or gains 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 an gains..' According to the Tribunal, the Commissioner of Income -tax (Appeals) had omitted to take note of the above Item No. 13 and Note No. 17 of the return form and had also missed the true import of section 5 (2). In the opinion of the Tribunal, 'the sub -sections of section 10, in their effect, excluded some of the income 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'. As a result, the Tribunal reversed the order of the Commissioner of Income -tax (Appeals) and accepted the assessees appeal.'
(3.) IT appears to us that the Tribunal has taken a correct view of the matter. The Companies (Profits) Surtax Act has imposed a tax on every company in respect of 'so much of its chargeable profits of the previous year.. as exceed the statutory deduction..' 'Chargeable profits' has been defined in section 2 (5) to mean the total income of an assessee computed under the Income -tax Act, 1961, and adjusted in accordance with the provisions of the First Schedule. 'Statutory deduction' has been defined by section 2(8) to mean an amount equal to 10% of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of Rs. two hundred thousand, whichever is greater.;