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TMI Blog1976 (11) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... istant Commissioner on account of wrong deduction of unabsorbed depreciation allowed by the Income-tax Officer ? " The assessee is a Norwegian shipping company. The assessment year involved is 1958-59. The previous year ended on December 31, 1957. The facts stated by the Tribunal may be briefly stated as follows : (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 of rule 33 of the Indian Income-tax Rules, 1922, and the instructions issued under this rule. What was ultimately brought to tax was the net Indian profits of each ship employed in the Indian trade in the accounting year 1957. (ii) In view of the said instructions the Income-tax Officer disallowed depreciation on eight ships mentioned in his order as those ships were in the assessee's fleet for more than 20 years. (iii) The Income-tax Officer allowed Rs. 55,280 as depreciation in respect of the vessel "Tortugus" for its three round voyages of 195, 150 and 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the instructions were misinterpreted by the Appellate Assistant Commissioner, for, according to the Tribunal, the instructions could not go against the provision of section 10(2)(vi), proviso (c), to that section and rule 8 of the Rules. The Tribunal accordingly allowed the said claim in the following terms : " ............... Section 10(2)(vi) is quite clear in providing that depreciation on ships are to be allowed on the original cost and proviso (c) to the same section delimits the total allowance of depreciation from year to year to the extent of such capital cost. Under rule 8, the rates have been prescribed for the different kinds of ocean-going steamers and vessels. 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 we 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1955 and allowed the assessee's claim in the following terms : " ............... now under the present law the earlier losses could be set off against the profits and gains of any business, if only the assessee is found to carry on the particular business in respect of which the loss had arisen in earlier years in the year in which the claim for set-off is made. In the present case, therefore, since the appellant-company admittedly carried on business in shipping year after year and the unabsorbed depreciation relates to that business only, the appellant is legally entitled to claim set-off of earlier years' losses of Rs. 97,547 representing unabsorbed depreciation only, against the profits of the same shipping business as earned and found assessable for the assessment year 1958-59." It is an admitted fact that the assessment was made under the third method of rule33 and the instructions issued under this rule by the Central Board of Revenue as printed in the Income-tax Manual (10th edition) and all the authorities concerned have considered the instructions. Mr. Ajit Sengupta, learned junior counsel for the revenue, drew our attention to Circular No. 35/413-I/T/25, dated Augu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lea and Dr. Pal cannot be heard on it. That apart, it must fail because the instructions " merely lay down the manner of applying rule 33 " and do not in any manner fetter the quasi- judicial power of the Income-tax Officer. He also argued that the instructions are ultra vires the provisions of section 10(2)(vi), proviso (c), and rule 8 of the Rules, because they are inconsistent with these provisions of law. It is also his submission that the case of Ellerman Lines Ltd. v. Commissioner of Income-tax [1971] 82 ITR 913 (SC) does not apply to the present case. Before we further proceed we should record here that it is not the contention of Dr. Pal that rule 33 is ultra vires the Act or the instructions are ultra vires rule 33 as expressly stated by him before us. It has been stated in Ellerman's case [1971] 82 ITR 913 (SC) at page 918 of the report, that " it may not be possible to strictly comply with the provisions contained in section 4 and section 10(2) of the Act by the foreign shipping companies " whose ships ply all over the world and " possibly to get over such difficulty rule 33 was enacted. " It was found in Ellerman's case [1971] 82 ITR 913 (SC) that the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal fell into error in holding that the instructions cannot override section 10(2)(vi), proviso (c) to that section, and rule 8 of the Rules. The Tribunal allowed the assessee's claim for depreciation on " Tortugus " by following the instructions and rejected the instructions on question No. 1 on the ground that they are inconsistent with section 10(2)(vi), proviso (c) to that section, and rule 8 of the Rules. It also held on question No. 3 that the instructions, though they were previously valid, have become obsolete after the introduction of section 24(2) in the Act. To us these inconsistencies appear to be mutually conflicting and cannot be supported. Dr. Pal has supported the aforesaid inconsistencies, but we must reject it, for they are mutually destructive. I will now briefly re-state a few facts before dealing with the contentions of Dr. Pal on the instructions. Instead of furnishing annual accounts for its world business, the assessee furnished a separate and complete annual accounts for its Indian trade. The Income-tax Officer disallowed depreciation on eight ships by following the instructions as those ships were included or borne on the assessee's fleet for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-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 calculation 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 of Indian receipts to total receipts is applied to the world profits calculated according to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears. 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 of 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 fleet, 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 assessments of foreign shipp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen it would be highly inequitable and unjust that a ship which was employed in the Indian trade in a particular year would not get any depreciation allowance afterwards if it was kept out of the business altogether for the purposes of repair or renovation, say for 20 years. (v) Depreciation must be allowed under the instructions on each ship employed in the Indian trade " in a given year ". Hence, if a ship was employed in the Indian trade for the first time, say in 1940, and thereafter it was employed in the Indian trade for the second time, say in 1961, the depreciation on that ship must be allowed in that second year notwithstanding the fact that no Indian trade was carried on by that ship in between these two years. (vi) Before depreciation allowance can cease, a right to receive it must arise or accrue under the law. Therefore, if a ship was included in the assessee's Indian fleet in the year in which the assessee became first liable to be assessed in India and such ship was not employed in the Indian trade for 20 years from the said first year of assessment a right to depreciation on that ship cannot accrue for these 20 years and accordingly question of cesser of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the first year in which the assessee became first liable to be assessed in India. Moreover, the words " company's fleet " used in clause (b) clearly indicate that the word " fleet " used in clause (a) means the assessee's fleet and not its Indian fleet. The expression "Indian trade" and the expression " world trade " used in their context also do not support the contentions of Dr. Pal. Further, the plain meaning of the word " fleet " used in clause (a) and the words "company's fleet " used in clause (b) cannot be restricted to those ships of the assessee which had actually carried on the Indian trade in a particular year. The word " fleet " and the words " company's fleet " mean the same thing, namely, all the ships belonging to the assessee and employed by the assessee in its shipping business or trade. Therefore, if a ship belonging to the assessee was engaged in the trade in the first year in which the assessee became first liable to be assessed in India, depreciation on that ship is not deductible after 20 years from that year in view of clause (a) of the instructions even if that ship was afterwards engaged in its Indian trade. Similarly, after the first year in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Subject to clauses (a) and (b) of the instructions, depreciation is allowable on each ship under the instructions employed in the Indian trade in a given year. Clauses (a) and (b) provide both the starting point of deductible depreciation on ships and its cesser for the purpose of computation of the Indian income of the foreign shipping companies. The right to get the depreciation allowance on the ships in clause (a) accrues in the year in which the assessee first becomes liable to assessment in India and it ceases after the 20th year which is to be calculated from the aforesaid first year irrespective of the question as to whether they have carried on any Indian trade or not in this span of 20 years. Similarly, the right to get the depreciation allowance on ships in clause (b) accrues when they are added to the assessee's existing fleet for the purposes of its trade and it ceases after they have remained for 20 years in the assessee's fleet irrespective of the question mentioned in the preceding paragraph. It also appears to us from Appendix " A " to rule 8 that for the purposes of depreciation allowance the legislature has contemplated 20 years to be the normal expec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other ships may take more than 365 days to complete their round voyages. These instructions, however, do not restrict the receipt, expenditure and the depreciation allowance to 365 days of the previous year in the case of the round voyages. Subject to clauses (a) and (b), the depreciation must be allowed in a given year and such " 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 ". The annual rate is fixed by rule 8 of the Rules. In determining the quantum of depreciation the proportion of the annual rate is, therefore, to be applied with reference to the number of days spent by a particular ship in the Indian trade whether at sea or at harbour as provided in the instructions. Accordingly, if the period spent by a ship in the Indian trade is either more or less than 365 days, the annual rate as fixed by rule 8 is to be applied with reference to the total number of days employed in the Indian trade in terms of the instructions. Therefore, where the period exceeds 365 days, the depreciation must also be allowed on that basis on an increased amount and on the same proporti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, Rs. 2,49,093 was set off against the assessee's income for the assessment year 1957-58, in which year only one ship, out of those seven ships, came to India and the entire unabsorbed depreciation pertaining to that ship was set off against the profits of that year. These seven ships did not come to India in the accounting year 1957, relevant to the assessment year 1958-59. Under the instructions the unabsorbed depreciation in respect of a particular ship can only be allowed against that particular ship in the subsequent years provided that it was employed in the Indian trade in the subsequent years. Therefore, the carried forward unabsorbed depreciation for the assessment year 1953-54 pertaining to those six ships cannot be set off against the assessee's profits for the assessment year 1958-59 and, accordingly, the contentions of Dr. Pal must fail. It may be noted here that in enhancing the assessment by Rs. 99,547, the Appellate Assistant Commissioner overlooked a vital fact, namely, that the net Indian income of the assessee was computed by the Income-tax Officer by applying the formula stated earlier. The result of this obvious oversight, as rightly conceded by Mr. Pal, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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