TMI Blog1980 (4) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... computed the total income at Rs. 1,63,572. It will be relevant for the present purpose to refer to certain portions of the order of the ITO. Dealing with the depreciation on these two vessels, the ITO observed, inter alia, as follows: "Deduct: Depreciation on vessels for reasons discussed in the assessment order for 1962-63, depreciation is not allowable on two vessels, viz., Bali Mindore, which were acquired in 1941 and have, therefore, completed twenty years in the assessment year 1961-62. Depreciation is allowed as under: Original cost of vessels S Kr. 237,331,047 Loss cost of Bali Mindore S Kr. 9,245,040 --------------------- S Kr. 228,086,007 " --------------------- He, thereafter computed the total income as under: " Depreciation @, 5% on S. Kr. 228,086,007 11,404,300 ------------------- World shipping income S. Kr. 5,216,913 World gross shipping income S. Kr. 142,309,418 Gross Indian freight Rs. 44,62,000 Profit applicable to India 5,216,913 ------------------- X Rs. 44,62,000 142,309,418 = Rs. 1,63,572 Total income = Rs. 1,63,572 " With the other items, we are not concerned. There was an appeal before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the aforesaid two ships as prescribed in Appendix I in terms of rule 5 of the Income-tax Rules, 1962, and subject only to the limitation prescribed by section 34(2)(i) of the I.T. Act, 1961. " In the premises, the Tribunal in Reference No. 506 of 1972 has referred the following question for our consideration : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to depreciation allowance under rule 5 of the Income-tax Rules, 1962, even in respect of the ships, Bali and Mindore, for the assessment year 1963-64 ? " In I.T. Reference No. 670A of 1972 for the two assessment years, viz., 1964-65 and 1965-66, the questions referred are as under: assessment year 1964-65 : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to depreciation allowance under rule 5 of the Income-tax Rules, 1962, in respect of the ships, Bali, Mindore and Mangalore, for the assessment year 1964-65: Assessment year 1965-66 : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any was liable to pay tax on such proportion of its net profits as could be reasonably attributable to its Indian operations and where the round voyage method was adopted, the assessment was to be made by first determining the ratio of the net profits of each voyage to the total gross earnings of that voyage and then applying the same ratio to the gross Indian freight earnings. Such apportionment of the profits of each round voyage had also been furnished to the department, according to the assessee-company, in respect of all the ships that had touched the Indian ports during the calendar year 1957. The Tribunal further noted that it would be evident from such statement that although the previous year adopted for the purpose of the assessment in that case was the calendar year 1957, the profits of certain vessels had been worked out for a period exceeding 365 days while that in the case of others related to periods less than a year and what was ultimately brought under assessment was the net freight earnings of all the ships which had called at the Indian ports at any time. The main point in that appeal was the claim for depreciation on certain vessels which were borne on the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 1958-59 confined himself only to the language used in the notes and held that the word " fleet " referred to all ships of the company irrespective of whether these were employed on Indian trade or elsewhere and there was no warrant for assuming that depreciation should cease only if a particular vessel had been in India for twenty assessment years. The AAC in that order, therefore, confirmed the order of the ITO, who had disallowed the depreciation claimed under s. 10(2)(vi) of the Indian I.T. Act, 1922, on all such ships, as had been borne on the assessee-company's fleet, for more than 20 years after the profits yielded by them became first liable to assessment under the Indian I.T. Act, 1922. It was contended before the Tribunal in that appeal for the assessment year 1958-59 relying on the provisions of s. 10(2)(vi) of the Indian I.T. Act, 1922, by the assessee-company that unlike the case of other business assets on which depreciation was allowed annually on the written down value, as explained in sub-s. (5) of the same section, depreciation in respect of ships employed by a shipping company had to be allowed on the original cost of the ships at the rate prescribed und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, viz., Bali, Mindore, Mangalore and Travancore. The other facts were more or less the same except that the AAC did not accept the view of the assessee-company, that depreciation was admissible, on the ground that the ships were acquired more than twenty years prior to the commencement of the relevant assessment year and the rate of depreciation on original cost was normally only for a period of 20 years. The Tribunal, however, following the order for the previous year, allowed the appeal. The AAC gave detailed reasons and, therefore, it would be relevant for the present purpose to refer to the AAC's order. The AAC dealing with the appeal for the assessment year 1964-65 noted the contention on behalf of the assessee. He recorded that the authorised representative of the assessee did not dispute the proposition that under the I.T. Act a ship was entitled to depreciation for a period of 20 years only. But it was submitted on behalf of the assessee that three ships for that depreciation had been actually allowed on these ships during this period, the period should be excluded in counting the period of 20 years for which the depreciation is admissible on ships. For the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of section 34(2), in its case, does not arise. Under rule 10, the total world income of a non-resident person is computed in accordance with the provisions of the Income-tax Act and, therefore, in my opinion, in the case of a non-resident person, the provisions of section 34(2) can be applied only at the stage of determining his total world income. While working out the total world income of a non-resident, the fact that in a particular year a ship did not visit India, would not make any difference so long as it was used for the purpose of the business of the non-resident person. The three ships in question might not have touched any Indian port during the war period but as they were used by the appellant-company for the purpose of its business, it cannot be said that they were not allowed any depreciation for the war period. Therefore, in my opinion, the war period cannot be excluded for the purpose of counting the period of 20 years for which the depreciation is admissible on ships." In the year under consideration r. 10 (ii), according to the AAC, was being applied for determining its income accruing or arising in India. Under this method, first of all the world total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserved, inter alia, as follows : " The appellant's counsel has submitted that during the war period, no ship of the appellant-company visited India and, therefore, there was no assessment in its hands for any of the years falling within this period. He has contended that as there were no assessments for these years, no depreciation was actually allowed to the appellant-company even for the purpose of determining its total world income. I, however, do not find any force in this contention. The fact that none of the ships of the appellant-company visited India during the war period does not mean that these ships were not utilised by the appellant-company for the purpose of its business. Actually speaking, at the time of hearing, I was informed by the appellant's counsel that during the war period, these ships have been requisitioned by the Govt. which was paying for the ships and paying the freight to the appellant. As the appellant had operated these ships for the purpose of its business even during the war period, computation of its world income must have been made and, therefore, the appellant must have been allowed depreciation on the ships. As the freight realised in India w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in respect of depreciation made under sub-section (1) or sub-section (1A) of section 32 or under the Indian Income-tax Act, 1922 (XI of 1922), or under any Act repealed by that Act or under the Indian Income-tax Act, 1886 (II of 1886), shall, in no case, exceed the actual cost to the assessee of the building, machinery, plant, furniture, structure or work, as the case may be. Explanation.-Where a capital asset is transferred (i) by a holding company to its subsidiary company or by subsidiary company to its holding company, or (ii) by a company to another company in a scheme of amalgamation, and the condition specified in clause (iv) or clause (v) or, as the case may be, clause (vi) of section 47 are satisfied, then, in determining the aggregate of all deductions in respect of depreciation under this clause, account shall also be taken of the deductions in respect of depreciation allowed in the case of the company from which the asset has been transferred ; (ii) nothing in clause (i) or clause (ii) or clause (iv) of sub-section (1) of section 32 shall be deemed to authorise the allowance for any previous year of any sum in respect of any building, machinery, plant or f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s " subject to the provisions of this Act the total income of any previous year of a person who is a non-resident, all income from whatever source derived. Sub-section (2) of s. 5 of the Act which deals with the total income of a person who is not resident, provides as follows : " (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1.-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance-sheet prepared in India. Explanation 2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) or any amount which bears the same proportion to the total profits or gains of the business of the same person as the receipts so accruing or bearing to the total receipts of the business ; and (iii) in such other manner as the ITO may deem suitable. There are three different procedures envisaged under r. 10. As we have mentioned before, the decision of the Tribunal for the assessment year 1958-59 came up before this court in the case of CIT v. Wilh Wilhelmsen Lines Ltd. reported in [1978] 115 ITR 10. There the Tribunal had decided only the question whether any instruction which was contrary to the section or the rules made by the CBDT or the CBR would be binding or not. The court examined the question whether depreciation had been properly allowed in that case. There three questions were referred to this court, viz. (p. 12): " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to get depreciation allowance under rule 8 of the Income-tax Rules even in respect of ships which had formed part of the assessee's fleet for more than twenty years? 2. Whether, on the facts and in the circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued under the old Act can only continue after the coming into operation of the Act of 1961, provided such instructions were not inconsistent with any provision of the I.T. Act, 1961. It was urged before us that there was no such similar provision in the Indian I.T. Act, 1922. This proposition was not disputed on behalf of the revenue, before us. But what was urged before us was that under cl. (k) of sub-s. (2) of s. 297 in order to invalidate (the instructions) there must be repugnancy between the provisions of the Indian I.T. Act, 1922, and the I.T. Act, 1961. It was urged that there was no such repugnancy between the instructions under the old Act and the relevant provisions of the Act of 1961 that would make such instruction inoperative by virtue of repugnancy. We are, however, unable to accept this contention. It appears to us that in order to survive the repeal, the instructions must not be inconsistent with any corresponding provisions of the present Act. Now, the basis upon which the assessment has been made and the revenue's case for disallowing the depreciation which is allowable under s. 32 read with s. 34(2) and s. 43(i) and s. 43(vi) with r. 10 of the I.T. Rules, 1962, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained in the Income-tax Manual, could not be considered to be a proper guide when the construction of a statute was involved. But this observation was made in an appeal from the High Court in answering the question referred to it under s. 66(1) of the Indian I.T. Act, 1922. The question for consideration there was mainly the expression " end of the previous year " in s. 25(4) of the Indian I.T. Act, 1922. There, Mr. justice Mahajan, as the learned Chief justice then was, referred to the history of the enactment of the scheme of the charging section and then observed that their Lordships' attention was drawn to direction contained in the Instruction Manual in force for a number of years and thereafter contended that the department itself had placed the same construction as was placed by one of the senior judges of the High Court on sub-ss. (3) and (4) of s. 25 and that was the true construction of these two sub-sections. The Supreme Court had no hesitation in rejecting this argument. It then observed that the department had no authority. Therefore, the Supreme Court observed that the interpretation placed by the department on these two sub-sections, which was in conformity with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not in respect of specific matter but was in respect of a general instruction. In the case of Gestetner Duplicators P. Ltd. v. CIT [1979] 117 ITR at page 8, the Supreme Court observed that the circular dated 16th January, 1941, could not affect the question of deductibility of contribution because when a question of interpretation fell, the circular or a direction could not be permitted to curtail the provisions of the Act. At page 13 of the report, the nature of the circular had been set out and it would be apparent from the nature of the circular that the circular was not in respect of a specific matter but was of a general nature. In the case of Smt. Bhagirathi Devi Jalan v. CIT [1978] 112 ITR 534 (Cal), the question was what would be the period of limitation of action under s. 33B of the Indian I.T. Act, 1922. There, whether the order of the Commissioner in revision was in time or not, was not the question but it was a question whether an opportunity of hearing was to be given. On an appeal, the Tribunal remanded the case with a direction to pass an appropriate order. It was held that the period of limitation would not apply to any subsequent order. There, the court di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision was not perverse, then such a decision was not open to judicial review. This decision has nothing to do with the proposition whether the CBDT that issued the administrative direction could curtail the provisions or the operation of the Act. Reliance was also placed on certain observations of the Bombay High Court in the case of Kirtilal Jaisinglal Co. v. CIT [1980] 121 ITR 279. There, the Bombay High Court dealt with a circular issued by the CBR which stated that the intention of cl. (a) of the proviso to Explanation 2 to s. 24(1) of the Indian I.T. Act, 1922, had always been that where bona fide forward sales were entered into with a view to guarding against the risk of raw materials or merchandise in stock falling in value the losses arising as a result of such forward sales should not be treated as speculative losses (at p. 284). Accordingly, such transactions should not be treated as speculative transactions within the meaning of Explanation 2 to s. 24(1) of the said Act. The circular further stated that the hedging sales could be taken to be genuine only to the extent the total of such transactions did not exceed the total stocks of raw materials or merchandise in ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assumption that r. 33 applied (headnote): " (i) that the income or loss referred to in the instructions dated February 10, 1942, meant the net income or net loss; (ii) that the assumption that the computation of the appellant's income had to be made on the second of the three bases mentioned in rule 33 was incorrect. The second of the three bases mentioned in rule 33 could not apply and the fact that the authorities under the Act as well as the parties were under a mistaken impression could not alter the true position in law. Therefore, the appellant's income had to be computed either under the first or under the third basis and since the officer did not adopt the first basis, the most appropriate basis under which he could have computed the income was the last basis, namely, 'in such manner as the Income-tax Officer may deem suitable ' ; (iii) that the Tribunal's decision that in computing the Indian income on the basis of the ratio certificate given by the U.K. authorities the investment allowance should be taken into account was a reasonable decision and it accorded with the instructions given by the Board ; (iv) it further held that the fact that the proviso to s. 10(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viated from the provisions of the Act, yet this court held that the circular was binding on the Income-tax Officer." The Supreme Court, therefore, upheld the order of the Appellate Tribunal and answered the question in favour of the assessee. This first decision ([1971] 82 ITR 913 (SC)) upheld that the third basis under r. 33 which is equivalent to sub-r. (iii) of the new rule (r. 10 of the I.T. Rules, .1962) permitted assessment in case of difficulty in such manner as the ITO might deem suitable. In that case having regard to the conduct of the parties the Supreme Court agreed that the basis taken by the ITO was suitable. That was permissible under r. 10 of the I.T. Rules, 1962, which is in pari materia with the third basis of r. 33 of the Indian I.T. Rules, 1922. But in the case of an assessment being made under the second basis such discretion is not given either to the ITO, and in this case, as has been noted by the AAC, the third basis of r. 10 had not been attracted nor it is the case of revenue that in the instant case, as regards powers, the third basis had been attracted. There is, however, a more fundamental difference in this case, that is to say, the fact that it emer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written down value would not have been allowed any depreciation. In the case of CIT v. Nandlal Bhandari Mills Ltd. [1966] 60 ITR 173, the Supreme Court had occasion to consider this aspect where the assessee-company, which was incorporated in Indore, owned and ran textile mill and some ginning factories. Until April 1, 1950, when the Indian I.T. Act was extended to Part B States, including Madhya Bharat of which Indore became a part, the respondent was for many years assessed at Bombay under the Indian I.T. Act as a non-resident and for some years as a resident. It was also assessed in Indore under the Indore Industrial Tax Rules, 1927. For those years, in which it was assessed as a non-resident under the Indian I.T. Act, only that part of its profits attributable to the sale proceeds of goods received in British India or in regard to which contracts were accepted in British India were brought to tax. For the assessment years 1950-51 to 1953-54 (the accounting years being calendar years 1949 to 1952), in ascertaining the written down value of the building, machinery and plant, under para. 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, only the greate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, the actual cost to the assessee ; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the 1922 Act, or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886, was in force. (Emphasis supplied). The pivot of the definition of 'written down value' is the 'actual cost' of the assets. Where the asset was acquired and also used for the business in the previous year, such value would be its full actual cost and depreciation for that year would be allowed at the prescribed rate on such cost. In the subsequent year, depreciation would be calculated on the basis of actual cost less depreciation actually allowed. The key word in clause (b) is ' actually '. It is the antithesis of that which is merely speculative, theoretical or imaginary. ' Actually ' contra-indicates a deeming construction of the word ' allowed ' which it qualifies. The connotation of the phrase ' actually allowed ' is thus limited to depreciation actually taken into account or granted an given effect to, i.e., debited by the Income-tax Officer against th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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