1968 (4) TMI 16 - HC - Income Tax

Detemination of assessee s Indian income u/r 33 of the IT Rules - assessee s claim for the investment allowance under the U.K. Act (corresponding to development rebate under the Indian IT Act, 1922)is not allowable - destination earnings collected in India should be considered as part of the Indian earnings in determining the assessee s Indian income

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that the destination earnings collected in India should be considered as part of the Indian earnings in determining the assessee's Indian income under rule 33 of the Income-tax Rules?
2. Whether the Tribunal was right in allowing the claim of the assessee for the investment allowance under the U.K. Act in the computation of its total world income for the purpose of determining the assessee's Indian income under rule 33 of the Income-tax Rules, 1922?

Detailed Analysis:

Issue 1: Destination Earnings as Part of Indian Earnings
The primary question here was whether the destination earnings collected in India should be included in the assessee's Indian earnings under Rule 33 of the Income-tax Rules. The assessee, a non-resident British shipping company, contended that the U.K. ratio certificate should be adopted without any adjustments, which excluded destination earnings collected in Indian ports. The Income-tax Officer, however, did not include these destination earnings in the Indian earnings.

Upon appeal, the Appellate Assistant Commissioner and subsequently the Tribunal held that the freights collected in Indian ports, even if related to cargo loaded outside India, were earned and received in India and should be included in the Indian earnings. The Tribunal confirmed this view, leading to the first question being referred to the High Court.

The High Court analyzed Rule 33, which provides three methods for estimating Indian profits. The second method, adopted in this case, involves computing the Indian profits in proportion to the total profits of the business as the receipts accruing or arising in the taxable territories bear to the total receipts of the business. The Court found that the destination earnings accrued and arose in India, and thus should be considered part of the Indian earnings.

The Court also examined the Central Board of Revenue Circular No. 7 of 1942, which did not explicitly exclude destination earnings. Therefore, the Tribunal was correct in including destination earnings in the Indian earnings.

Conclusion: The Tribunal was right in holding that the destination earnings collected in India should be considered as part of the Indian earnings under Rule 33.

Issue 2: Investment Allowance under the U.K. Act
The second issue concerned whether the Tribunal was correct in allowing the assessee's claim for the investment allowance under the U.K. Act in computing the total world income for determining the Indian income under Rule 33. The department argued that the conditions for the investment allowance under the U.K. Act differed from those for the development rebate under the Indian Income-tax Act.

The Tribunal's decision was based on a letter from the Secretary, Central Board of Revenue, which allowed the investment allowance as a deduction for the development rebate under the Indian Income-tax Act, provided the rate of allowance in the U.K. was not greater than the rate of development rebate in India.

However, the High Court found that interpreting the U.K. Act and equating the investment allowance with the development rebate under the Indian Act was beyond its jurisdiction. The Court emphasized that the U.K. investment allowance and the Indian development rebate are distinct and should not be conflated.

Moreover, the letter from the Central Board of Revenue was not considered a formal "order, instruction, or direction" under section 5(8) of the Indian Income-tax Act. The Court held that the Tribunal's reliance on this letter was misplaced, and the investment allowance under the U.K. Act should not be allowed in computing the Indian income.

Conclusion: The Tribunal was wrong in allowing the claim of the assessee for the investment allowance under the U.K. Act in computing the total world income for determining the Indian income under Rule 33.

Final Judgment:
1. The first question was answered in the affirmative, confirming that the destination earnings collected in India should be considered part of the Indian earnings.
2. The second question was answered in the negative, stating that the Tribunal was wrong in allowing the investment allowance under the U.K. Act for computing the Indian income.