1984 (3) TMI 108 - AT - Income Tax

Summary

Issues Involved:
1. Method of computing depreciation for a foreign shipping company.
2. Reopening of assessments by the Income Tax Officer (ITO).
3. Application of Rule 10 of the Income-tax Rules, 1962.
4. Interpretation of Circular No. 7 of 1942 by the Central Board of Revenue (CBR).
5. Determination of actual cost and depreciation in terms of Indian rupees.
6. Application of Rule 115 of the Income-tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Method of Computing Depreciation for a Foreign Shipping Company:
The primary issue in these appeals is whether the depreciation for the assessee, a foreign shipping company, should be allowed based on the cost reflected in the books of account in foreign currency or converted into Indian rupees at the time of acquisition of the asset. The assessee argued that depreciation should be computed in foreign currency to ensure that the entire cost is recouped by the end of the period. The ITO, however, recalculated depreciation in Indian rupees based on the exchange rate at the time of acquisition, leading to reduced depreciation allowances.

2. Reopening of Assessments by the Income Tax Officer (ITO):
The ITO reopened the assessments for the years 1971-72 to 1973-74, reducing the depreciation and consequently the business loss. The Commissioner (Appeals) upheld the reopening, stating that depreciation under section 32 of the Income-tax Act, 1961, must be in Indian rupees. The Tribunal, however, found that the reopening was proper but disagreed with the recalculation method used by the ITO.

3. Application of Rule 10 of the Income-tax Rules, 1962:
Rule 10 provides three alternatives for determining income in cases of non-residents. The ITO adopted the second alternative, which involves finding the proportion of Indian receipts to total receipts and determining the profits therefrom. The Tribunal agreed with this method but emphasized that the computation of depreciation should be in the currency in which the books are maintained, not necessarily in Indian rupees.

4. Interpretation of Circular No. 7 of 1942 by the Central Board of Revenue (CBR):
The Tribunal referred to the decision of the Calcutta High Court in CIT v. Ellerman Lines Ltd., which highlighted a CBR circular allowing foreign shipping companies to adopt UK wear and tear allowance for computing income under rule 33. This circular, still binding, implies that depreciation should be based on the currency in which the foreign company is assessed abroad, supporting the assessee's method of computing depreciation in foreign currency.

5. Determination of Actual Cost and Depreciation in Terms of Indian Rupees:
The Tribunal emphasized that the actual cost to the assessee must be redetermined for each assessment year, considering the exchange rate relevant to that year. This ensures that the depreciation reflects the actual cost to the assessee in the applicable currency. The Bombay High Court's decision in CIT v. Bassein Electric Supply Co. Ltd. supported this view, stating that actual cost can be altered or redetermined for each assessment year.

6. Application of Rule 115 of the Income-tax Rules, 1962:
Rule 115 specifies that the rate of exchange for converting foreign currency to Indian rupees should be applied only after determining the income accruing or arising to the assessee in foreign currency. This means that depreciation, a step in determining income, should be computed in foreign currency before applying the exchange rate for conversion to Indian rupees.

Conclusion:
The Tribunal concluded that the assessee is entitled to depreciation as claimed and allowed in the original assessments. The additions in the reassessments were deleted, and the appeals were allowed. The Tribunal's decision emphasized the importance of computing depreciation in the currency in which the books are maintained, ensuring that the actual cost to the assessee is accurately reflected in the depreciation allowances.