PETITIONER:
M/S WILH WILHELMSEN
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX,WEST BENGAL
DATE OF JUDGMENT: 09/07/1996
BENCH:
JEEVAN REDDY, B.P. (J)
MAJMUDAR S.B. (J)
CITATION:
JT 1996 (6) 167 1996 SCALE (5)43
ACT
HEADNOTE
JUDGMENT
THE 9TH DAY OF JULY,1996 Present:
Hon’ble Mr.Justice B.P.Jeevan Reddy
Hon’ble Mr.Justice S.B.Majmudar Manoj Arora, Ms.Shipra Ghose Jain, Manoj Pillai, Rahul P.Dave and D.N.Gupta, Advs. for the appellant Dr.V.Gaurishankar, Sr.Adv. Ms.A.Subhashini, S.Rajappa,and S.N.Terdol, Advs. with him for the Respondent
JUDGMENT
The following Judgment of the Court was delivered: M/S.WILH, WILHELMSEN V. COMMISSIONER OF INCOME TAX, WEST BENGAL-I.
JUDGMENTB.P. JEEVAN REDDY, J.
This appeal is preferred by the assessee on the basis of a certificate of fitness issued by the Calcutta High Court under Section 66A(2) of the Indian Income Tax Act, 1922 [the Act]. Three questions were referred under Section 66(2) of the Act at the instance of the Revenue. The questions are:
"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 year?
2. Whether, on the facts and in the
circumstances of the case, the
Tribunal was right in deleting the
addition of Rs.55,280/- made by the
Appellate Assistant Commissioner an
account of excess depreciation in
respect of the vessel ’Tortugas’?
3. Whether, on the facts and in the
circumstances of the case, the
Tribunal was justified in law in
deleting the enhancement of
Rs.97,547/- to the total income
made by the Appellate Assistant
Commissioner on account of wrong
deduction af unabsorbed
depreciation allowed by the Income
Tax Officer?"
The Calcutta High Court answered Question No.1 in the negative,i.e.,in favour of the Revenue. Question No.2 was answered in the affirmative,i.e., in favour of the assessee, while Question No.3 was answered in the negative,i.e.,in favour of the Revenue and against the assessee. On an application filed by the assessee for issuance of a certificate under Section 66A(2), the High Court [a different Division Bench] issued the certificate observing that the case raises certain important questions of law which require to be considered by this Court. The questions so indicated are:
"The issue involved in this
reference concerns the
interpretation of the circular and
the instructions issued by the
Central Board of Revenue vis-a-vis
the applicability of Rule 33 of the
Income Tax Rules. The answers
involve the question of vital
importance for the assessment of
shipping companies up to the
assessment year 1976-77 and how
Section 44-B would be applicable.
The reference dealt with the
question whether a shipping company
is entitled to depreciation under
section 10(2)(vi) of the Income Tax
Act, 1961 in view of the
instructions issued by the Central
Board of Revenue. This reference
was also involved with the question
whether the assessee would become
disentitled to such depreciation in
view of the said instructions
contained in the circular of the
Central Board of Revenue. It is
true that the scope and effect of
the circular of this type have been
considered by the Supreme Court in
the case of Ellermen Lines Ltd. v.
Commissioner of Income Tax, 82
I.T.R. 913 and Navnitlal Javeri v.
Sen 56 I.T.R. 198, but the question
here is to what extent a circular
which curtail the right of the
assessee under the Act or the Rule
can be given effect to as against
the assessee. It is true, as was
noted by the Supreme Court in the
cases referred to herein before as
also in the instant case that
circulars merely provide a method
of the application of Rule 33, but
by providing that method if the
circular attempts to curtail the
right to depreciation by the
assessee then the jurisdiction of
such circulars to curtail right
granted either by the Act or the
Rule framed by the Act would
require consideration. Further more
also on the interpretation of the
circular there is a substantial
question involved - what does the
expression ’fleet’ in the
instructions issued by the Central
Board of Revenue mean. For the
aforesaid reasons we are of the
opinion that this case involves
substantial and important questions
of law which require to be
considered by the Supreme Court."
The appellant-assessee is a Norwegian Shipping Company. The assessment year concerned is 1958-59 for which the accounting year was the calender year 1957. The relevant facts, as stated in the judgment of the High Court, are the following: (i) Instead of furnishing the annual accounts for its world business for the Assessment Year 1958-59, the assessee furnished separate complete annual accounts for its Indian trade, that is to say, for all-round voyages of each ship to and from the Indian Ports. The assessment was made under the third method contained in Rule 33 of the Indian Income Tax Rules 1922 and the Instructions issued thereunder. The profits that were brought to tax ultimately were the net Indian profits of each ship employed in the Indian trade in the Accounting Year 1957. (ii) Following the Instructions aforementioned, the Income Tax Officer disallowed depreciation of eight ships mentioned in his order on the ground that the said ships in the assessee’s fleet were of more than twenty years. (iii) There was an unabsorbed depreciation of about Rs.3,31,493/ - in the Assessment Year 1953-54. An amount of Rs.2,49,093/- was set-off against the assessee’s income for the Assessment Year 1957-58. The unabsorbed depreciation of Rs.97,547/- for the Assessment Year 1953-54 pertained to seven ships, which did not come to India in the accounting year relevant to the Assessment Year 1958-59. In the books of the assessee, the said sum of Rs.97,547/- was shown as a business loss brought forward from the earlier years. The Income Tax Officer allowed the assessee to set-off the said amount against the profits for the accounting year relevant to Assessment Year 1958-59. [We are not stating the facts relating to Question No.2 since it was answered by the High Court in favour of the assessee and because there is no appeal by the Revenue against it.] (iv) On appeal, the Appellate Assistant Commissioner affirmed the order of the Income Tax Officer. Before the Appellate Assistant Commissioner, the Income Tax Officer contended that allowing the set-off of Rs.97,547/- by him was a mistake. the assessee accepted the said contention. Accordingly, the Appellate Assistant Commissioner enhanced the assessment by disallowing the said sum of Rs.97,547/-. (v) The assessee appealed to the Tribunal where it contended that the Instructions insofar as they provide for disallowance of depreciation on the said eight ships [which did not come to India during the accounting year relevant to Assessment Year 1958-59] were ultra vires proviso (c) to Section 10(2)(vi) of the Act and Rule 8 of the Indian Income Tax Rules, 1922. It contended that it is entitled to depreciation in respect of all these ships under the provisions contained in Section 10(2)(vi) proviso (c) and Rule 8. It submitted further that the words "company’s fleet" occurring in Instructions were referable only to those ships of the assessee which were employed in its Indian trade.
The Tribunal did not go in the question whether the Instructions were ultra vires the statutory provisions aforesaid but held that the Appellate Assistant Commissioner has misunderstood the said Instructions. It allowed the assessee’s appeal on the following -reasoning:
"When the depreciation is allowed
under the Indian Income-tax Act it
follows that in the matter of
calculating the overall or total
depreciation for the purpose of
proviso (c) to section 10(2)(vi)
one has also to take into account
only such depreciation as has been
actually allowed under the Indian
Income-tax Act. As such are not
concerned with any notional
depreciation or depreciation which
might have been provided, in the
accounts other than those relevant
for the purpose of assessment under
the Indian Income-tax Act. This, to
our mind, seems to be the most
patent and obvious interpretation
of Section 10(2)(vi). In the case
of the present assessee which is
assessed on the round voyage
method, a particular ship might
have called at the Indian port some
25 years back and may be employed
for the company’s Indian trade for
the second time only in the 26th
year. That does not mean that the
company will not be entitled to
depreciation in the 26th year
because in the intervening 25 years
the ship was evidently not used for
purpose of the round voyage via
India and as such no depreciation
had been allowed under the Indian
Income-tax Act except for the first
year. *** *** ****
In the case of a foreign shipping
company like that of the appellant
company there may be ships which
are borne more than 20 years on the
total world fleet and many of the
ships might not have been used at
all in the Indian Waters but there
is no prohibition under the Indian
Income-tax Act against allowing
depreciation on such ships simply
on the ground that the ship had
formed a part of the company’s
fleet -for more than 20 years. Was
therefores hold in favour of the
appellant company viz. that
depreciation allowance as provided
in Rule 8 should be allowed on all
ships employed in connection with
the company’s Indian trade subject
only to the limitation imposed
under proviso (c) to section
10(2)(vi)."
The Tribunal further held that the said Instructions which may have been valid when issued, became obsolete in view of the introduction of Section 24(2) in the Act by the Finance Acts 1955. It found that inasmuch as the assessee carried on the same business in the relevant assessment year as was carried on in the previous relevant years, the assessee is entitled to set-off the unabsorbed depreciation of Rs. 97,547/- against the profits of the Assessment Year 1958-59.
We may now set out the opinion of the High Court on the three questions referred. On the first question, the High Court held that the Instructions are not inconsistent with the provisions of the Act or the Rules. They provide for assessment of total income of a foreign shipping company where it furnishes annual accounts for the whole of its businesss Indian and foreign, as well as where it furnishes the accounts only in respect of its Indian trade. By following the latter method, the foreign shipping company cannot get depreciation allowance more than it is entitled to in the former method. The Instructions are clear. There is no ambiguity therein. Depreciation on a ship is allowed only when it is actually employed in the trade or business. From Appendix-A to Rule 8, it appears that for the purposes of depreciation allowance, the Legislature has contemplated twenty years to be the normal expectation of the life of a ship. The order passed by the Income Tax Officer is consistent with the said provisions. The Instructions merely clarify the rule position. Whether statutory or not, they are binding upon the Income Tax authorities having been issued under sub-section (8) of Section 5 of the Act.
On Question No.3, the High Court held that inasmuch as ships in respect of which the unabsorbed depreciation was sought to be carried forward did not come to India during the accounting year relevant to Assessment Year 1958-59 the said amount of Rs.97,547/- cannot be set-off against the profits of the said assessment year.
[We are not setting out the opinion of the High Court on Question No.2, since the said question is not in issue before us.]
For a proper appreciation of the questions arising herein, it is necessary to set out the relevant provisions of law.
Sub-section (8) of Section 5 of the Act empowered the Central Board of Revenue to issue orders, instructions and directions which were binding upon all officers and persons employed in the execution of the Act. The sub-section read as follows:
"(8) All Officers and persons
employed in the execution of this
Act shall observe and follow the
orders, instructions and directions
af the Central Board of Revenue:
Provided that no such
orders,instructions or directions
shall be given so as to interfere
with the discretion of the
Appellate Assistant Commissioner in
the exercise of his appellate
functions." The provision is clear. It requires no elaboration. It is, however, evident that the power so conferred on Central Board of Revenue has to be exercised for the purposes of and within the four corners of the Act.
Sub-section (2) of Section 10 provided the allowances to be made while ascertaining the profits and gains of business, profession and vocation. Clause (vi) of subsection (2) provided for depreciation on buildings, machinery, land or furniture being the property of the assessee. Proviso (c) appended to clause (vi) provided that "the aggregate of all allowances in respect of depreciation made under this clause and clause (vi-a) or under any Act repealed hereby, or under the Indian Income-tax Act, 1886, shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be".
Rule 33 of the Indian Income Tax Rules read as follows:
"33. In any case in which the
Income-tax Officer is of opinion
that the actual amount of the
income, profits or gains accruing
or arising to any person residing
out of the taxable territories
whether directly or indirectly
through or from any business
connection in the taxable
territories or through or from any
property in the taxable
territories, or through or from any
asset or source of income in the
taxable territories, or through or
from any money lent at interest and
brought into the taxable
territories in cash or in kind
cannot be ascertained, the amount
of such income, profits or gains
for the purposes of assessment to
income-tax may be calculated on
such percentage of the turnover so
accruing or arising as the Income-
tax Officer may consider to be
reasonable, or on an amount which
bears the same proportion to the
total profits of the business of
such person (such profits being
computed in accordance with the
provisions of the Indian Income-tax
Act) as the receipts so accruing or
arising bear to the total receipts
of the business, or in such other
manner as the Income-tax Officer
may deem suitable."
Now, coming to the Instructions issued under Rule 33, and which are the main subject-matter of debate herein, they read thus:
"This Rule (Rule 33) provides the
manner of ascertaining the income,
profits or gains of a non-resident
person, when the actual amount of
his income, profits or gains
chargeable to tax in British India
cannot be arrived at.
In respect of foreign shipping
companies carrying on business in
British India the following method
will be followed for the purpose of
calculating their income from
shipping business in respect of
assessment for the year 1939-40 and
for earlier years:
i) If a company furnishes annual
accounts for the whole of the
business, Indian and foreign, the
second method provided by Rule 33
will reasonably be applied.
Depreciation has only to be
considered in calculating the
world-profits. These are to be
calculated according to the Indian
Income tax Act. Profits calculated
according to the United Kingdom Act
will, therefore, require certain
adjustments. Deductions permitted
in the United Kingdom but not
permitted in Indian will have to be
added back and deductions
permissible in India but not
permissible in the United Kingdom
will have to be allowed. If any
company, however, prefers to claim
the depreciation allowed by the
United Kingdom Income-tax
authorities, the Commissioners of
Income-tax may adopt that figure.
Otherwise, depreciation will have
to be calculated according to the
Indian Rules. What follows applies
to the calculated of depreciation
according to the Indian rules. For
this purpose, a complete
depreciation record has to be
maintained for the entire fleet
Depreciation begins to run from the
first year in which the company is
assessed in India that is, the
first year in which its profits or
loss were determined for the
purpose of deciding whether it was
liable to Indian Income-tax.
Unabsorbed depreciation i.e., any
balance of depreciation which
cannot be allowed in any year owing
to the profits not being sufficient
to cover the full amount
permissible under the Indian rules
will be carried forward and allowed
as far as possible in calculating
the world-profits according to the
Indian method in the following year
and if necessary in subsequent
years provided that unabsorbed
depreciation for 1938-39 and
earlier years cannot be set off
against an assessment for 1939-40
or any subsequent year.
The proportion Indian receipts
to total receipts is applied to the
world profits calculated according
to the Indian method (if there are
any such profits) and the result is
the Indian income liable to tax. No
further deduction is permissible
from the amount thus arrived at on
account of depreciation (unabsorbed
or otherwise) or anything else. The
due proportion of all allowances
permissible is automatically set
off against the Indian profits by
the above method.
This method is equally
applicable whether a company works
out the profits for each voyage or
follows any other method of account
provided that it prepares complete
annual accounts for the whole
businesss Indian and foreign, and
furnishes the accounts of gross
receipts, Indian and foreign.
Some lines do not furnish
complete annual accounts for their
world business. They keep separate
complete annual accounts for their
Indian trade that is,for all round
voyage to and from Indian Ports.
The proper course is then to apply
the method just described treating
the profits of the Indian trade and
the gross receipts of the Indian
trade as though they were the
world-profits and the world-
receipts respectively. In fact, the
business other than the Indian
trade is ignored.
ii) A difficulty sometimes arises
in such cases owing to the fact
that the ships employed in the
Indian trade are constantly being
changed. Unless United Kingdom
depreciation is accepted as
indicated above, a depreciation
record will have to be kept for
every ship employed at any time in
the Indian trade. Depreciation must
be allowed on each ship employed in
the Indian trade in a given year
and the allowance must be a
proportion of the annual rate
calculated with reference to the
number of days spent in the Indian
trade whether at sea or in harbour.
Any unabsorbed depreciation in any
year must be distributed among the
ships in the Indian trade in that
year proportion to the capital cost
of each and the unabsorbed
depreciation’thus allotted to any
ship can only be allowed in any
subsequent year against the same
ship.
The allowance should cease:
a) on ships which were included in
the fleet in the first year in
which the company becomes liable to
assessment in India (irrespective
of whether it was actually found to
have a taxable income in that year
or not), after the twentieth year
beginning with that year;
b) on ships subsequently added to
the company’s fleet, after they
have been borne on the fleet for 20
years.
In both cases the period may
be extended proportionately where
the United Kingdom depreciation is
allowed in calculating the profits
of the Indian trade which take the
place as already explained of the
world profits.
Obsolescence cannot be allowed
in these cases.
British Shipping Companies--
Assessment of: when assessing
British Shipping Companies, --the
Income-tax Officer should accept a
certificate granted by the Chief
Inspector of Taxes in the United
Kingdom stating (1) the ratio of
the profits of any accounting
period as computed for the purposes
cf the United Kingdom income-tax
computed without making any
allowance for wear and tear to the
gross earnings of the Company’s
whole fleet, and their ratio of the
United Kingdom allowance for wear
and tear to the gross earnings of
the whole fleets or (2) the fact
that there were no such profits.
The expression ’gross earnings’ of
the company’s whole fleet means the
total receipts of the Shipping
Company excepting only receipts
from non-trading sources such as
income from investments. Assessment
for 1940-41 onwards = The above
instructions should also be
followed in respect of the
assessment of foreign shipping
companies for 1940-41 onwards.
These instructions inter alia allow
a foreign shipping company
furnishing annual accounts for the
whole of its business. Indian and
foreign to adopt the U.K. wear and
tear allowance in lieu of the
depreciation allowance under the
Indian Income-tax Act for the
purpose of the computation of its
income in accordance with the
second method provided by Rule 33,
and also allow a British shipping
company to elect to be assessed on
the basis of a ratio certificate
granted by the U.K. authorities
regarding the income or loss and
the wear and tear allowance."
[Quoted from the Paper Book]
It would be evident from a perusal of the above provisions that Section 10(2)(vi) does not specifically provide for allowance of depreciation on foreign ships trading with India. Rule 33 also does not specifically provide for the situation except that the last portion of the rule empowers the Income Tax Officer to arrive at the actual amount of incomes profits or gains accruing or arising to any person residing outside taxable territories in such other manner as he deems suitable where such ascertainment cannot be done according to the first two methods indicated therein. It is precisely to provide for certain specific situations that the Central Board issued the aforesaid Instructions under Rule 33. The Instructions specifically lay down the method and the manner in which depreciation has to be worked out on ships owned by a foreign shipping line carrying on business in British India. In this case, it is admitted that the appellant-company did not prepare and furnish the complete annual accounts for its entire businesss Indian and foreign, along with an account of its gross receipts, Indian and foreign. It kept a separate annual account in respect of its Indian trade and submitted the same to the Income tax authorities. The Instructions provide inter alia for such a situation as well. The Instructions issued by the Central Board under Rule 33 merely elucidate and elaborate the manner in which the business income of such foreign shipping lines are to be ascertained. These Instructions are relatable to the last/third alternative provided by Rule 33. We are, therefore, in agreement with the High Court that the aforesaid Instructions do not run counter to Rule 33 or for that matter to Section 10(2)(vi). Evidently, these Instructions were issued in view of the problems faced and experience gained by the department and to meet situations not expressly provided for by the Act or the Rules. They are in the nature of guidance to the assessing officers. We are also in agreement with the High Court that the Instructions are clear and unambiguous and that the Income Tax Officer was bound to follow them. The Instructions specifically provided that depreciation must be allowed on each ship employed in the Indian trade in a given year and that the allowance must be a proportion of the annual rate calculated with reference to the number of days spent in the Indian trade whether at sea or in harbour. They further provided that any unabsorbed depreciation in any year must be distributed among the ship in the Indian trade in that year in proportion to the capital cost of each ship and that the unabsorbed depreciation thus allotted to many ship can only be allowed in any subsequent year against the same ship. The Instructions also provide clearly that the allowance shall cease on ships after the expiry of twenty years. It is not disputed by the learned counsel for the assessee before us that the Instructions have been correctly understood or followed by the Income Tax Officer. The complaint rather is that the Instructions themselves are inconsistent with the statutory provisions. Since we have held that the Instructions are not inconsistent with nor can be said to be outside the purview of Rule 33 read with Section 5(8) of the Act, no further question arises. Accordingly, we affirm the answer given by the High Court to Question No.1.
So far as Question No.3 is: concerned, the answer to it also depends upon the validity and applicability of Instructions aforesaid. It has been found by the High Court that the seven ships, the unabsorbed depreciation whereof was sought to be set-off in the Assessment Year 1958-59 did not come to India in the Accounting Year 1957 relevant to the Assessment Year 1958-59. According to the Instructions, the unabsorbed depreciation in respect of a particular ship can only be allowed against that particular ship in a subsequent year provided that it was employed in the Indian trade in the subsequent year. Accordingly, we affirm the answer given by the High Court to Question No.3 as well.
The learned counsel for the appellant brought to our notice the subsequent decision of the Calcutta High Court in Commissioner of Income tax, West Bengal v. Swedish East Asia Company Limited [(1981) 127 I.T.R.148] where the Division Bench criticized certain observations in the judgment under appeal with respect to the scope of the power conferred upon Central Board under Section 5(8). Since we have held that the Instructions concerned herein are relatable to Rule 33 it is not necessary to go into the question whether the power conferred upon the Central Board to issue instructions can be employed for issuing instructions contrary to the Act and the Rules. Obviously it can’t be so used an aspect already dealt by us hereinabove. The learned counsel also brought to our notice that the decision of the Calcutta High Court in Swedish East Asia Company Limited has been followed by the Bombay High Court in Commissioner of Income Tax v. Minerva Maritime Corporation [(1985) 155 I.T.R.258]. For the reasons given above, this submission does not carry the appellant’s case any further.
Now, a word about the order of the High Court granting certificate. The order granting certificate raises certain questions which do not directly arise from the judgment of the High Court. The order granting certificate seems to assume that the Instructions are inconsistent with the statutory provisions which assumption, in our respectful opinion, is not warranted, as has been indicated by us hereinabove.
For the above reasons, the appeal fails and is dismissed with costs. Advocate’s fee Rupees ten thousand consolidated.