Foreign income of a non-resident falls outside total income for surtax capital computation, confirming a broader reading of rule 4.

Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 was held to cover income of a non-resident company accruing or arising outside India, because such income is outside "total income" under section 2(45) read with section 5(2) of the Income-tax Act, 1961. The expression "income, profits and gains ... not includible in its total income" is therefore not confined to amounts expressly excluded by section 10. The prescribed surtax return form and notes also treated foreign income of a non-resident as income not includible in total income. The Tribunal's approach in computing capital was upheld in favour of the assessee.

---

---

Issues: Whether, for the purpose of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the expression "income, profits and gains ... not includible in its total income as computed under the Income-tax Act" covers income of a non-resident company accruing or arising outside India, or is confined only to incomes expressly excluded under section 10 of the Income-tax Act, 1961.

Analysis: Rule 4 requires the capital of a company to be reduced where a part of its income, profits and gains is not includible in total income. For a non-resident, the definition of total income under section 2(45) read with section 5(2) limits total income to income received or deemed to be received in India and income accruing or arising or deemed to accrue or arise in India. Income accruing or arising outside India is therefore outside total income itself. The prescribed return form and its notes under the Surtax Rules also treat, as examples of income not includible in total income, agricultural income and, in the case of a non-resident company, income accruing or arising outside India. The phrase in rule 4 is thus not confined to exclusions under section 10 alone.

Conclusion: The phrase covers the foreign income of a non-resident company, and the Tribunal was correct in computing capital by reference to income rather than operating revenue. The question was answered in the affirmative and in favour of the assessee.

---