ORDER
R.N. Singhal, Accountant Member
1. Under the Surtax Act, these are cross-appeals. The amounts involved are substantial and the points involved are interesting.
2. At the outset, we may first note that in essence, Surtax is levied on so to say, the super-profits of a company: Starting from total income as per the income-tax assessment, certain adjustments are made to arrive at the’ Chargeable profits’ and the most note-worthy adjustment is that of income-tax paid being allowed as deduction. Then, a percentage of ‘capital employed’ is allowed as deduction therefrom to arrive at the excess of chargeable profits, on which tax is levied on a progressive scale. Thus, out of the taxed income, deduction is allowed for a percentage of capital of the company and the balance is taxed.
3. Disputes in the present appeals arose on account of existence of profits from contracts works in Libya and Iran. Taxes were levied in those countries and the schemes were substantially different from the scheme of Indian Income-tax. In Libya, Libyan income-tax was levied on an income of Rs. 1,81,17,259. Retention amounts, i.e., money retained out of the running bills were not included in the quantification of income-tax in Libya. But, in computing the total income under the Indian Income-tax Act, the ITO added back Rs. 43,28,502 (Rs. 81,59,579 being total retention amount as reduced by the retention amount taxed in earlier years, i.e. Rs. 38,29,077). Further, the income in India corresponding to the income taxed in Libya of Rs. 1,81,17,259 came to only Rs. 71,74,294. Thus, the assessee in Libya paid tax on an income of Rs. 1,81,17,259, but that did not include the retention amount of Rs. 43,28,502. In India, total income was computed at Rs. 1,15,02,796, but it was inclusive of the retention amounts ofRs. 43,28,502. In Libya, tax actually paid was Rs. 1,05,93,946.
4. Having noted the figures, we may now note that as per Rule 2(ii) of the First Schedule of the Surtax Act, along with the amount of tax paid in India (vide Rule 2(f), deduction is available also for the tax actually paid in respect of the foreign income as per the laws of that foreign country. Main dispute is about the quantification of that sum. We may, therefore, now note the precise phraseology of Rule 2(h). which is in the following terms –
In computing the chargeable profits of a previous year, the total income computed for the year under the Income-tax Act, shall be adjusted as follows :-
1. …
2. The balance of the total income arrived at after making the exclusions mentioned in Rule 1 shall be reduced by –
(i)…
(ii) In the case of a company which has been charged to tax in a company outside India on any portion of its income, profits and gains included in its total income as computed under the Income-tax Act, the tax actually paid in respect of such income, profits and gains in the said country in accordance with the laws in force in that country after allowance of every relief due under the said laws :
…
The Surtax Officer rejected the assessee’s claim that the whole of Libyan tax paid of Rs. 1,05,93,946 (say Rs. 106 lakhs) would be deductible. He held that since in the total income computed under the Income-tax Act, only a sum of Rs. 71,74,295 (say, Rs. 72 lakhs) was included out of income of Rs. 1,81,17,259 – (say Rs. 181 lakhs) computed in Libya for levy of Libyan Income-tax, it was only the sum of Rs. 72 lakhs which was included in the total income and hence the deduction available under Rule 2(ii) would be the amount which bears the same proportion to the total tax paid of Rs. 106 lakhs, which the Indian total income of Rs. 72 lakhs bears to the income computed and taxed in Libya, i.e., Rs. 181 lakhs. He computed this deduction at Rs. 42,72,554. The first appellate authority held that in respect of Libyan income, the amount actually brought to tax in India was Rs. 115 lakhs (inclusive of the retention amount taxed in India, though not taxed in Libya) and hence the amount deductible would bear to the total tax paid in Libya (106 lakhs) the same proportion as the Libyan income taxed in India (Rs. 115 lakhs) bears to the income computed in Libya for levy of Libyan Income-tax (Rs. 181 lakhs). He further justified it by saying that the Libyan income included in the Indian total income of Rs. 115 lakhs is less than the total Libyan income taxed in Libya of Rs. 181 lakhs. He indicated that figures at Rs. 67,26,183, subject to quantification by the assessing officer.
5. In the context of these facts and provisions, assessee’s grounds of appeal marked 1.1 and 1.2 are relevant. They may be extracted as below :
1.1 On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in rejecting the submissions of the appellant to the effect that the tax actually paid by the appellant in Iran and Libya ought to be considered while determining the deduction under Rule 2(ii) of the First Schedule to the Companies (Profits).Surtax Act, 1964.”
1.2 “The Commissioner of Income-tax (Appeals) failed to appreciate that Rule 2(ii) of the First Schedule does not warrant the computation of doubly taxed income and the foreign tax paid on such doubly taxed income unlike the provisions of Section 91 which specifically refer to ‘doubly taxed income’.
Thus, in effect, the assessee claims that under Rule 2(ii), the whole of tax paid in Libya (Rs. 106 lakhs) should be allowed as a deduction.
6. In cross-appeal, the Department’s substantive ground is as follows –
On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing the ITO to allow deduction under Rule 2(ii) of the First Schedule to the Companies Profits (Surtax) Act, 1964 on the amount of tax that would have been payable in Libya on the retention amount, even though no tax was charged by the Libyan Government on such retention amount nor any such tax was paid by the assessee in Libya during the previous year.
Thus, in effect, the Department claims that under Rule 2(ii), the amount deductible should bear to the total tax paid in Libya (Rs. 106 lakhs), the same proportion as the income taxed in India (Rs. 71 lakhs excluding the retention amount taxed in India but not taxed in Libya Rs. 43 lakhs) bears to the income computed in Libya for Libyan Income-tax, i.e., Rs. 181 lakhs.
7. Before us the learned advocate for the assessee very strenuously argued that the Departmental authorities were in error in allowing deduction in respect of the Libyan Income-tax only with reference to the doubly taxed income. He explained that in effect, the Departmental authorities have determined the proportion of the total tax paid in Libya (Rs. 106 lakhs) with reference to those items of income, which are taxed in India as well as in Libya – in short, the concept of doubly taxed income. He submitted that there was no warrant for restricting the deduction under Rule 2(ii) on that basis.
8. On the other hand, the learned Departmental Representative submitted that the Rule 2(ii) warrants that the actually taxed income in the foreign country should have been included in the total income as per the Indian Income-tax Act, also. According to him, any part which is not taxed in the foreign country (in our case, the retention money of Rs. 43 lakhs) cannot be regarded as a sum which has been brought to tax in the foreign country. Similarly, he submitted that any part of the income taxed in the foreign country, but not included in the total income in India, would not give rise to the foreign tax deductible under Rule 2(ii).
9. We have very carefully considered the rival submissions. The decision depends primarily on the construction of phraseology of Rule 2(ii). Assessee’s case is that if the Company has paid foreign income-tax and any part of the corresponding foreign income is included in the total income, the whole of foreign tax paid becomes deductible. On the other hand, Department’s contention is that foreign tax relatable to only that part of the income which is taxed in foreign country as well as in India should be deductible. In our opinion, the construction canvassed on behalf of the assessee is preferable.
Rule 2(ii) extracted above, can be viewed as first referring to the Company, which has been charged to tax outside India and then laying down that ‘any portion’ of the taxed foreign income is included in the total income as computed under the Income-tax Act. If these conditions are satisfied, the tax actually paid in respect of foreign income would be deductible under Rule 2(ii). The CIT(A) has rightly noted that much depends upon the meaning to be attributed to the word ‘such’ appearing in Rule 2(ii). In common parlance, this word ‘such’ connotes more often than not, qualitative aspect (as distinguished from quantitative aspect). In the matter before us, this is all the more important because in Rule 2(ii) in the first part, the words used are ‘any portion of its income…’. While along with the word ‘such’, the word ‘portion’ is not put. There could have been quite some substance in the Department’s contention, if the word ‘such’ was followed by the words ‘portion of or in place of the word ‘such’, the words ‘so much’ were used. In Rule 2(ii), first a stipulation is there that the total income includes’any portion’ which has suffered tax in a foreign country and then there is a direction that the foreign tax is deductible. To say that deduction should be allowed only of that portion of foreign tax which is attributable to that portion of foreign income, which is included in the total income would not be correct. Indeed, it would be much worse to say that the deduction should be allowed only of that portion of the foreign tax, which is attributable to that portion of the foreign income which has suffered tax in the foreign country as well as in India.
10. We would, therefore, hold that the tax actually paid in Libya, viz., Rs. 1,05,93,946 (subject to verification) would be deductible under Rule 2(ii) in place of Rs. 41,95,121 allowed by the assessing officer and Rs. 67,26,183 allowed by the first appellate authority, as indicated at the bottom of page 5 towards the end of para 3.5 of the appellate order of the CIT(A) dated 17th September, 1986.
11. Thus, on this point, assessee’s ground is allowed and the Department’s appeal is dismissed.
12. Next dispute raised in the assessee’s appeal is contained in the grounds marked 1.3 and 1.4, which are in the following terms –
1.3 “The Commissioner of Income-tax (Appeals) further erred in holding that the contractors tax levied in Iran as a percentage of total receipts, could not be treated to be a tax in respect of income and accordingly in directing the Income-tax Officer to enhance the assessment and not to consider the contractors tax amounting to Rs. 45,28,274 paid in Iran for the purposes of computing the deduction under Rule 2(ii) of the First Schedule.”
1.4 “The Commissioner of Income-tax (Appeals) failed to appreciate that although the contractors tax in Iran is computed at percentage of the total receipts, it is levied under the Direct Taxation Act as minimum tax and forming part of tax payable on income or profit in Iran.
Thus, it is in le context of tax paid in Iran. In para marked 3.6 of the appellate order, the CIT(A) has noted four items totalling Rs. 94,89,640 in the context of tax paid in Iran. He has noted that the first three items are taxes in respect of income, but the fourth item is not. That fourth item is noted as follows :
…
4% Contractors Tax (on total receipts of Erection Work – both
Rial portion and foreign currency portion) Rs. 45,28,274
The CIT(A) held that it was not taxed in respect of income, profits, gains, etc. The learned advocate for the assessee submitted that it is quantifiable with reference to the gross receipts but it is in reality, tax in respect of income. He has submitted that entire tax is deducted at source at 5.5% of the gross amounts payable, but at the time of final assessment, credit is given only for 11/2% of the amount of total payments. According to him, therefore, the remaining 4% of the gross amounts payable is retained as part of tax on income. He has emphasised that it is only a way of quantifying the tax in respect of income and it does not cease to be a tax in respect of income. He has cited parallels in the Income-tax Act for charging income-tax as a percentage of gross receipts, etc., such as Section 44AC, Section 44BB, Section 44BB A, Section 44BBB and indirectly through Section 44D also. He has further submitted that this apart, after all, Surtax is a tax on super-profits of the company and the liability is fastened and quantified after allowing deduction of even Income-tax paid. According to him, there is still greater reason for allowing as deduction, the tax paid in foreign country. He has relied also on Article 76 of the Iran Taxation Law, whose English version has been furnished before us.
13. On the other hand, learned Departmental Representative submitted that the said sum of Rs. 45,28,274 is not tax in respect of income, but it is tax on the total contract value. Be as it may, he said that sum of Rs. 45,28,274 is not included even in the total income for income-tax purposes.
14. We have considered the rival submissions. In our opinion, there is no substance in the contention raised on behalf of the assessee. First and foremost point is that this sum of 4% of gross receipts is in addition to the tax levied with reference to the total income. This is not in substitution of tax levied on total income in Iran. This very aspect distinguishes it from the provisions of Section 44AC, Section 44B, Section 44BB, Section 44BBA, etc., cited by the learned advocate for the assessee. The point is that in the above-mentioned sections of the Income-tax Act, there is a deeming provision of quantifying the business income with reference to the receipts of purchases, etc. In Iran, taxes on income are separately levied and in addition, thereto is a tax on gross receipts. The aspect of surtax being a tax on super-profits is taken care of by the submission of the learned Departmental Representative that this tax on total receipts docs not form part of the total income computed for income-tax purposes. Be as it may, even the English rendering of Article 76 of the Iran Taxation Law does not help the assessee.
15. Learned advocate for the assessee has emphasised that this 4% Contractors Tax on gross receipts was bracketed with corporate tax on income. Actually, a careful reading indicates that this bracketing was only for the purpose of quantifying the liability of the employer (the person or entity for whom the contract was done), if he failed to identify and intimate the contractor. The point is that in Iran, corporate tax with reference to income and contractors tax (at 4% of the gross amounts payable) would have been charged from the contractor. But, if the employer failed to intimate and identify the contractor, the above-mentioned amounts would be collected from the employer. In other words, the liability of the employer would be equal to that of the contractor in the case of default on the part of the employer. This does not change the nature of Contractors Tax. Assessee’s this ground of appeal is rejected.
16. Assessee’s grounds of appeal marked 2.1 and 2.2 are as follows-
2.1 On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in rejecting the appellants’ submissions regarding increases in the capital employed by Rs. 1,25,97,072 on account of retention money not credited in the accounts but taxed in the assessment order.”
2.2 “The Commissioner of Income-tax (Appeals) failed to appreciate that if the retention money had been credited in the books of account, the profits for the earlier year and the reserves as on the first day of the computation period would have been higher to that extent and accordingly the increase in the reserve ought to be considered while computing the capital employed as per the Second Schedule to the Companies (Profits) Surtax Act, 1964.
Obviously, they are in the context of quantification of the capital base and assessee’s contention is that in the final accounts (including balance sheet), the retention amounts have not been taken into account, but in India tax has been paid thereon. It is claimed that retention amounts are amounts receivable by the assessee and the balance after payment of income-tax thereon should be regarded as part of capital. The point made is that retention amounts are amounts receivable and assessee pays tax on the same income in India. Therefore, post-tax portion of the retention amounts should be regarded as part of capital of the assessee. It is submitted that, viewed somewhat differently it is a part of profits and the balance left after the tax element thereon would be surplus which would be taken to reserve. The CIT(A) has rejected the contentions of the assessee in para marked 4.2 of his appellate order.
17. The learned Departmental Representative has submitted that for quantification of surtax liability capital base has to be computed in accordance with the Second Schedule of the Companies (Profits) Surtax Act, 1964 and there is no provision under that Act for making any such adjustment.
18. In reply, learned advocate for the assessee drew our attention to foot-note 9 of Schedule-18 annexed to the accounts for the year ended 30th September, 1981, wherein, there is a mention of this aspect and it is stated that the reserves and surpluses would have been appropriately higher than those shown in the final accounts.
19. We have very carefully considered the rival submissions and we find no substance in the pleas raised by the learned counsel for the assessee. Learned Departmental Representative is right that the Second Schedule of the Surtax Act, 1964 is a complete code for quantification of capital. A perusal of different rules and explanations, etc. incorporated in that schedule shows that they .refer to specific items as per the balance-sheet of the Company drawn up ‘in the form of Balance Sheet’ given in Part-I of Schedule-VI of Companies Act, 1956. There is no scope for taking into account any amounts not disclosed in the balance sheet drawn up as per the formats prescribed under the Companies Act, 1956. There is no substance in the contention of the learned advocate for the assessee that the relevant note viz. No. 9 in Schedule-18 annexed to the accounts should be regarded as part of the balance sheet for this purpose. The point is that the note explains the position, but does not change the figures of” the balance-sheet. At any rate, even if it is presumed that there would be excess available out of the retention amounts, there is no further presumption of the same being in the nature of reserves. This contention of the assessee therefore, deserves to be rejected. We do so.
20. In effect, assessee’s appeal is partly allowed and Department’s appeal is dismissed.