Foreign tax deduction and capital employed under surtax rules turned on strict statutory construction and balance-sheet figures.

Rule 2(ii) of the First Schedule to the Companies (Profits) Surtax Act, 1964 allowed deduction of foreign tax actually paid in Libya where the related income was included in Indian total income, and the Tribunal held that the deduction could not be limited to only the portion attributable to double taxation; the full tax paid, subject to verification, was deductible. The claimed addition of retention money to capital employed under the Second Schedule was rejected because capital employment had to be computed strictly from the balance-sheet figures contemplated by the statutory schedule, and amounts not credited in the accounts could not be introduced through accounting notes or assumed reserve accretions.

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Issues: (i) Whether, under rule 2(ii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the full amount of foreign tax actually paid in Libya was deductible, or only a proportion attributable to income also taxed in India; (ii) Whether the retention money not credited in the accounts but taxed in India could be added to capital employed under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether, under rule 2(ii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the full amount of foreign tax actually paid in Libya was deductible, or only a proportion attributable to income also taxed in India.

Analysis: The rule allows deduction of the tax actually paid in a foreign country in respect of income, profits and gains included in the total income computed under the Income-tax Act. The phraseology was construed to focus on whether any portion of the foreign income is included in Indian total income, not on a confined notion of doubly taxed income. The Tribunal held that the language did not justify restricting the deduction to a proportion of foreign tax attributable only to the overlapping portion of income.

Conclusion: The full foreign tax actually paid in Libya, subject to verification, was deductible under rule 2(ii), and the assessee succeeded on this issue.

Issue (ii): Whether the retention money not credited in the accounts but taxed in India could be added to capital employed under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The Second Schedule was treated as a complete code for computation of capital employed and was read as referring to the figures disclosed in the balance-sheet prepared in the prescribed form. Amounts not reflected in the balance-sheet could not be brought into the capital base by reference to accounting notes or by an that retained sums would have increased reserves. The claimed adjustment had no support in the statutory scheme.

Conclusion: The claimed increase in capital employed was not allowable, and the assessee failed on this issue.

Final Conclusion: The foreign tax deduction issue was decided for the assessee, while the capital-employment adjustment was rejected, leaving the assessee only partially successful overall.

Ratio Decidendi: Where a provision allows deduction of foreign tax actually paid in respect of income included in total income, the deduction cannot be curtailed by importing a doubly-taxed-income limitation unless the statute expressly says so; conversely, capital employed under a statutory schedule must be computed strictly from the balance-sheet figures contemplated by the schedule.

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