1980 (10) TMI 96 - AT - Income Tax

Issues Involved:
1. Entitlement to depreciation allowance on a turnover basis versus both turnover and time basis.
2. Reopening of the entire depreciation question during reassessment.
3. Direction to ensure unabsorbed depreciation from earlier years is carried forward and allowed as a set-off.
4. Legality of reassessment proceedings under Section 147(b) of the IT Act.
5. Correct method of calculating depreciation for non-resident companies maintaining accounts in foreign currency.
6. Pro rata basis for depreciation allowance.

Detailed Analysis:

1. Entitlement to Depreciation Allowance on Turnover Basis vs. Both Turnover and Time Basis:
The Revenue contended that the CIT (A) erred in holding that the assessee was entitled to depreciation allowance proportionately under IT Rule 10(ii) only on the turnover basis and not on both turnover and time basis as worked out by the ITO. The CIT (A) upheld the principle that the depreciation should be computed on the actual cost in rupees of the ships engaged in Indian trade, including those brought prior to 1966 when the rupee was devalued.

2. Reopening of the Entire Depreciation Question During Reassessment:
The CIT (A) allowed the assessee to contend that the entire depreciation question should be reopened to see whether excessive depreciation had been allowed. This was based on the Bombay High Court decision in the case of New Kaiser-I-Hind Spg & Wvg Co Ltd. (1977) 107 ITR 760 (Bom). The Tribunal upheld this view, allowing the reassessment to consider the entire depreciation question.

3. Direction to Ensure Unabsorbed Depreciation from Earlier Years is Carried Forward and Allowed as a Set-off:
The CIT (A) directed the ITO to ensure that all unabsorbed depreciation relating to earlier years was duly brought forward and allowed as a set-off. The Tribunal found nothing wrong with this direction, stating that if there is any unabsorbed depreciation from earlier years, the assessee is entitled to such carry forwards as permitted by law.

4. Legality of Reassessment Proceedings Under Section 147(b) of the IT Act:
The assessee challenged the initiation of proceedings under Section 147(b), but the CIT (A) upheld the ITO's action, finding that excessive depreciation had been allowed, which led to the belief that the income of the assessee had been underestimated in the original assessment. The Tribunal supported this view, relying on the Supreme Court decision in the case of R.K. Malhotra, ITO, Group CIR II (I) Ahmedabad vs. Kasturbai Lalbhai (1977) 109 ITR 537 (SC).

5. Correct Method of Calculating Depreciation for Non-Resident Companies Maintaining Accounts in Foreign Currency:
The assessee argued that since it maintained accounts in Dinars and the ships were purchased in Dinars, the depreciation allowance should be computed in Dinars. The CIT (A) directed the ITO to compute the depreciation based on the actual cost in rupees, considering the devaluation of the rupee. The Tribunal upheld this direction.

6. Pro Rata Basis for Depreciation Allowance:
The CIT (A) had directed that the depreciation be calculated on a pro rata basis. The Tribunal found that the correct method of working the depreciation would only be on the basis of the time factor based on the number of days the ship had spent in Indian waters. The Tribunal allowed the assessee's cross-objection on this ground, stating that the plea was in consonance with IT Rule 5.

Conclusion:
The Tribunal dismissed the appeal filed by the Revenue and partly allowed the cross-objection filed by the assessee. The Tribunal upheld the CIT (A)'s directions to recompute the income in accordance with the law irrespective of the consequences and to ensure that any unabsorbed depreciation from earlier years was carried forward and allowed as a set-off. The Tribunal also upheld the method of calculating depreciation on a pro rata basis based on the number of days the ship had spent in Indian waters.

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