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TMI Blog1984 (3) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... r year. During the calendar year 1970, some of the ships had touched the Indian ports. The assessee has an account of the freight earnings from India in respect of these ships. This, however, is part of the freight earnings of the ships for each voyage. One illustration might make the point clear. The ship 'STRAAT CLARANCE' started a voyage on 4-11-1969. The voyage lasted for 51 days. During the course of this voyage, the freight earnings amounted to 490.481 guilders. The total operating expenditure amounted to 499.465 guilders. The freight earned by this ship from Indian ports amounted to 133.622 guilders. The assessee had worked out the pro rata share of the operating expenses in respect of this voyage. This amounted to 133.015 guilders. It would be seen that the assessee suffered a loss of about 9 guilders in the total voyage. Now, the ratio of the Indian freight receipts to the total receipts came to 26.63 per cent. This is how the pro rata expenditure has been fixed at 133 guilders. The proportionate loss as a result of touching Indian ports came to 2.293 guilders. 3. This ship was built in 1959 and it had been in use since 7-11-1959. The cost of the ship was f. 14,720,000. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64,333. After the devaluation, the value of the Indian rupee had gone down compared to the guilders and at the rate prevalent on the last day of the accounting year, the depreciation amounted to Rs. 9,21,890. 6. The ITO reopened the assessments for the three years we are now concerned with, since he was of the view that the assessee had been given excessive relief by way of depreciation. After reopening he reduced the depreciation to Rs. 5,64,333 for the assessment year, This led to a reduction in the business loss by Rs. 3,57,557. The reduction effected for the assessment year 1972-73 was Rs. 2,04,791 and for the assessment year 1973-74 was Rs. 1,56,604. 7. The assessee took up the matter in appeal. Although the reopening of the assessment was contested, the Commissioner (Appeals) found that the reopening was proper. With regard to merits, he held that depreciation in terms of section 32 of the Income-tax Act, 1961 ('the Act') has to be allowed only in terms of Indian rupees. According to him, if depreciation is to be calculated at the current rate of exchange after devaluation of the Indian rupee, then depreciation allowable would total more than the cost of the ship. This co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the total receipts and determine the profits therefrom. It appears to us that the ITO has adopted the second method. The assessee has given accounts of the total earnings from each voyage per ship. They have also given the freight earnings from the Indian ports and have arrived at a proportion which the Indian earnings bear to the total earnings. This is exactly what the second alternative visualizes. The fact that each voyage has been taken separately and the proportion determined is only a step taken in order to arrive at the final proportion. So, we will give a finding that the ITO has adopted the second alternative. 11. Now, once the ITO has adopted the second alternative, the question is whether it is open for him to go behind the depreciation fixed by the assessee in their books of account and recalculate it. Now, the rule says that the profits and gains should be computed in accordance with the provisions of the Act. It does not say that such computation should be in terms of Indian rupees. It is equally possible to do the computation in any foreign currency in which the books of account are maintained. The Act only provides for certain additions and disallowances. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 33, the wear and tear allowances should be corresponding to the wear and tear allowance given in the assessment in the country of origin. It is well settled that wear and tear allowance is another name given to depreciation. From the above, obviously, whatever has been allowed to the shipping companies in foreign countries should be allowed in India also. It would appear to us, therefore, that the allowance primarily has to be in the currency in which the foreign company would be assessable abroad. So, in our opinion, these instructions prohibit the ITO to tinker with the basic figures on which wear and tear allowance has to be granted. 13. It may be of interest to note that the Supreme Court also gave their interpretation of this very same circular when the matter came on appeal before them. This is Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC). It may be remembered that the above instruction was given in 1942. At that time there was no development rebate at all in the statute. The appeal before the Supreme Court was in respect of the assessment years 1960-61 and 1961-62. The company claimed that development rebate is also to be allowed under the same circular. This subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns are complied. Thus, the circular is applicable for any assessment made under the Act also. 15. We may approach the problem from another angle. Although depreciation is to be based on the actual cost to the assessee, that actual cost has to be determined in every assessment year. This is laid down by the Bombay High Court in CIT v. Bassein Electric Supply Co. Ltd. [1979] 118 ITR 884. After noting the authorities on this point, their Lordships held : ". . .The actual cost determined for a particular asset can be altered or redetermined for a particular assessment year . . . . Each year's income-tax assessment is self-contained. . . ." 16. So, for the assessment years 1971-72 to 1973-74, it is incumbent on the ITO to redetermine the actual cost. Now, what he has to determine is the actual cost of the assets to the assessee. We place particular emphasis on the expression 'to the assessee'. What is required to be determined is what the assessee had to pay. Now, this determination is as pointed out above, for each assessment year separately. For each assessment year, the ITO must ask what did the assets cost to the assessee for this assessment year ? Not, what did the assets cos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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