Full Judgment Text
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PETITIONER:
ELLERMAN LINES LTD.
Vs.
RESPONDENT:
C.I.T. WEST BENGAL, CALCUTTA
DATE OF JUDGMENT22/10/1971
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
GROVER, A.N.
CITATION:
1972 AIR 524 1972 SCR (2) 168
CITATOR INFO :
RF 1981 SC1922 (11,12)
RF 1992 SC1360 (9)
ACT:
Income-tax Act, 1922, ss. 5(8), 10(2)(vib)--Indian
Income-tax Rules, 1922, r. 33--Non-resident shipping
company--Computation of turnover--Ratio certificate issued
by U.K. Chief Inspector of Taxes mentioning investment
allowance granted by U.K. authorities--In assessing Indian
income of non-resident whether such investment allowance
(corresponding to development rebate under India Act)
whether to be taken into consideration--Effect of circular
by Central Board of Revenue.
HEADNOTE:
Under a circular issued in 1962 by the Central Board of
Revenue under s. 5(8) of the Indian Income-tax Act, 1922 the
assessing authorities were directed to permit British
Shipping Companies to elect to be assessed on the basis of a
ratio certificate granted by the U.K. authorities regarding
the income or loss and the wear and tear allowance. In 1964
the Board instructed the taxing authorities to take into
consideration the investment allowance granted by U.K.
authorities in computing the taxable income of the British
Shipping companies. The appellant was a non-resident
British’ Shipping company whose ships plied all over the
world including Indian waters. For the years 1960-61 and
1961-62 the Income-tax Officer computed it,, total income
under the Indian Income-tax Act, 1922 by taking into account
the ratio certificates issued by the Chief Inspector of
Taxes U.K. which were based on the assessments made on the
appellant in U.K. In making assessment the Income-tax
Officer purported to.proceed on the basis of r. 33 of the
Indian Income-tax Rules, 1922. One of the points considered
by the Income-tax Officer and the Appellate Assistant
Commissioner was whether the investment allowance was to be
taken into account in assessing the Indian income. Both of
them rejected the contention of the appellant that it should
be taken into account. The tribunal decided in favour of
the appellant but the High Court in reference took the oppo-
site view. In appeal to this Court by special leave.
HELD : (i) The authorities under the Act proceeded on the
basis that the computation of the income of the assessee had
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to be made on the second of the three bases mentioned in r.
33. Admittedly the profits of the assessee were not
computed in accordance with the provisions of the Act. That
being so, the second basis mentioned in r. 33 could not be
applied. This aspect was brought to the notice of the High
Court. But the High Court refused to consider the same on
the ground that both the Revenue as well as the assessee had
proceeded before the authorities under the Act on the
assumption that the second basis mentioned r. 33 was the
relevant basis. The High Court erred in adopting this
approach. The fact that the authorities under the Act as
well as the parties were under a mistaken impression could
not alter the true position in law. [174 H-175 B]
(ii) The computation of appellant’s income had to be made
either under the first basis viz. the calculation of the
profits and gains on such percentage of the turnover
accruing or arising as the income-tax Officer may consider
to, be reasonable, or on the third basis i.e. ’in such other
manner as the Income-tax Officer may deem suitable’. [175 C]
169
From the assessment orders it did not appear that the first
basis was adopted. The most appropriate basis under which
the income could have been computed was the last basis viz.
"in such other manner as the Income-tax Officer may deem
suitable". While adopting that basis the Income-tax Officer
is not required to rigidly apply the various conditions
prescribed in the Act in the matter of granting one or the
other of the permissible allowances. He may adopt any
equitable basis as long as the basis does not conflict
either with r. 33 or with the instructions or directions
given by the Board of Revenue. The power given to the
Income-tax Officer on that basis is a very wide power. That
power is available not only to the Income-tax Officer but
also to the Appellate Assistant Commissioner and the
Tribunal. [175 D-F]
As the Tribunal had determined the tax due from the
appellant on the basis of the ratio certificate given by the
U.K. authorities, it could not be said that the decision
reached by the Tribunal was an unreasonable one. The
Tribunal’s decision was in accord with the instructions of
the Board of Revenue. [175 F]
The fact that the proviso to s. 10(2) (vib) was incorporated
into the Act after the Board issued its instructions could
not affect either the validity of r. 33 or the force of the
instructions issued by the Board of Revenue because neither
r. 33 nor the instructions issued by the Board were strictly
in accordance with s. 10(2). [175 G-H]
Navnit Lal C. Javeri V. K. K. Sen, Appellate Asstt.
Commissioner, Bombay, 56 I.T.R. 198, applied.
JUDGMENT:
CIVIL APPELLATE JURISDICTION:Civil Appeals Nos. 2459 and
2460 of 1968 and 1161 and 1162 of 1971.
Appeals by certificate/special leave from the judgment and
order dated April 1, 1968 of the Calcutta High Court in
Income-tax Reference No. 163 of 1964.
N. A. Palkhivala, T. A. Ramachandran and D. N. Gupta, for
the appellant (in all the appeals).
Jagadish Swarup, Solicitor-General, B. B. Ahuja, R. N. Sach-
they and B. D. Sharma for the respondent (in all the
appeals).
The Judgment of the Court was delivered by
Hegde, J. The first two appeals have been brought by certi-
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ficate and the other two by special leave. The later two
appeals came to be filed because the certificates on the
basis of which the earlier appeals were brought, were found
to be defective inasmuch as the High Court had not given any
reason in support of those certificates. Hence it is
sufficient, if we deal with the later two appeals.
The appellant is a non-resident British Shipping Co. whose
ships ply in waters all over the world including the Indian
waters. For the assessment years 1960-61, and 1961-62 (the
relevant accounting years being calendar years 1959 and
1960), the Income-tax Officer computed its total income
taxable under the 12-L 256 Sup CI/72
170
Indian Income-tax Act, 1922 (which will hereinafter be
referred to as the, Act) by taking into account the ratio
certificates issued by the Chief Inspector of Taxes, U.K.
which were based on the assessments made on the appellant in
U.K. During the relevant period, there was in U.K.
"investment allowance" corresponding to "development rebate"
under the Act. The certificates issued by the Chief
Inspector contained the percentage ratio of the total world
profits of the appellant to its world earnings and similarly
the percentage ratio of the wear and tear allowance and the
investment allowance to its total world earnings. In making
the assessment the Income-tax Officer purported to proceed
on the basis of rule 33 of the Indian Income-tax Rules 1922.
The said rule reads :
"In any case in which the Income-tax Officer
is of opinion that the actual amount of the
income, profits or gains accruing or arising
to any person residing out of the taxable
territories whether directly or indirectly
through or from any business connection in the
taxable territories, or through or from any
property in the taxable territories or through
or from any assets or source ,of income in the
taxable territories, or through or from any
money lent at interest and brought into the
taxable territories in cash or in kind cannot
be ascertained, the amount of such income,
profits or gains for the purposes of
assessment to income-tax may be calculated on
such percentage of the turnover so accruing or
arising as the Income-tax Officer may consider
to be reasonable, or on an amount which bears
the same proportion to the total profits of
the business of such person (such profits
being computed in accordance wi
th the-
provisions of the Indian Income-tax. Act), as
the receipts so accruing or arising bear to
the total receipt of the business, or in such
other manner as the Income-tax Officer may
deem suitable."
The Income-tax Officer proceeded to assess the appellant-
assessee on the second of the three bases mentioned in rule
33; but in computing Indian earnings, he did not include the
destination earnings’ received in India ie.freight received
in Indian ports in respect of cargo loaded at non Indian
ports nor did he take into account the investment allowance
granted to the appellant in its U.K. assessments.
Aggrieved by the order of the Income-tax Officer, the
assessee took up the matter in appeal to the Appellate
Assistant Commissioner. The Appellate Assistant
Commissioner accepted the contention of the assessee as
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regards the inclusion of the desti-
171
nation earnings in the computation of the *Indian earnings
of the assessee but rejected its contention as regards the
investment allowance. Aggrieved by the order of the
Appellate Assistant Commissioner both the assessee as well
as the Revenue appealed to the income-tax Appellate
Tribunal. The Tribunal allowed the appeal of the assessee
and dismissed that of the Revenue. Thereafter at the
instance of the Revenue, the following two questions of law
were referred to the High Court under s. 66(1) of the Act.
" 1 . Whether, on the facts and in the
circumstances of the case, 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 ?
Whether, on the facts and in the circumstances
of the case, the Tribunal was right in
allowing the claim of the assessee for the
investment allowance under the U.K. Act
(corresponding to the development rebate under
the Indian Income-tax Act, 1922) in the compu-
tation of its total world income for the
purpose of determining the assessee’s Indian
income under rule 33 of the Income-tax Rules,
1922 ?"
The High Court answered the first question in favour of the,
assessee and the second in favour of the Revenue. Hence
these appeals by the assessee. The Revenue has not appealed
against the decision of the High Court as regards Question
No. 1. Hence we have only to consider whether the decision
of the High Court relating to Question No. 2 is in
accordance with law.
At the commencement of his arguments Mr. Palkhivala, learned
Counsel for the assessee indicated that rule 33 may not be
applicable to the facts of the case; but he said that for
the purpose of this case, he was prepared to proceed on the
basis that the said rule is the governing provision. The
authorities under the Act as well as the High Court have
examined the facts of this case on the basis of rule 33.
The second question referred to the High Court requires the
High Court to express its opinion whether on the facts and
in the circumstances of the case, the Tribunal was right in
allowing the claim of the assessee for the investment
allowance under the U.K. Act in the computation of the total
world income for the purpose of determining the assessee’s
Indian income under rule 33. Under these circumstances, it
would not be appropriate for, us at this stage to ignore the
,earlier proceedings and examine the case afresh on a wholly
diffe-
172
rent basis. Hence we have not gone into the question
whether rule 33 is applicable to the facts of the case. We
are proceeding on the assumption that it applies.
An mentioned earlier, the assessee is a non-resident. Its
liability to pay tax arises under ss. 3 and 4 of the Act.
The total income that arose or accrued or deemed to have
arisen or accrued to it in this country in the relevant
previous years is liable to be taxed in this country.
Section 10(2) provides for certain allowances to be deducted
while computing the taxable income. Section 10 (2) (vib)
deals with the development rebate. The material part of
that section reads:
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"In respect of a new ship acquired or new
machinery or plant installed after the 3 1st
day of March, 1954 which is wholly used for
the purposes of the business carried on by the
assessee, a sum by way of development rebate
in respect of the year of acquisition of the
ship or of the installation of the machinery
or plant, equivalent to,-
(i) in the case of a ship acquired after the 3
1st day of December, 1957, forty per cent of
the actual cost of the ship to assessee, and
(ii) in the case of a ship acquired before the
1st day of January, 1958 and in the case of
any machinery or plant, twenty-five per cent.
of the actual cost of the ship or machinery or
plant ,to the assessee."
The proviso to that clause says
"Provided that no allowance under this clause
shall be made unless-
(a) the particulars prescribed for the purpose
of clause (vi) have been furnished by the
assessee in respect of the ship or machinery
or plant; and
(b) except where the assessee is a company
being a licensee within the meaning of the
Electricity (Supply) Act, 1948 (54 of 1948),
or where the ship has been acquired or the
machinery or plant has been installed before
the 1st day of January, 1948 an amount
equal to
seventy-five per cent of the development
rebate to be actually allowed is debited to
the profit and loss account of the relevant
previous year and credited to a reserve,
account to be utilised by him
173
during a period of ten years next following :
or the purposes of the business of the
undertaking except-
(i) for distribution by way of dividends or
profits, or
(ii) for remittance outside India as profits
or for the creation of any asset outside
India,
and if any such ship, machinery, or plant is
sold or otherwise transferred by the assessee
to any person other than the Government at any
time before the expiry of ten years from the
end of the year in which it was acquired or
installed, any allowance made under this
clause shall be deemed to have been wrongly
allowed for the purposes of this Act."
It may be noted that in the case. of a shipping company like
the appellant before us, whose ships ply all over the world,
it may not be possible to strictly comply with the
provisions contained in S. 4 of s. 10(2). The provisions
dealing with the levy of Income-tax are not identical in all
countries. It may well nigh be impossible for a shipping
company like the appellant to rigidly comply with the
requirements of the laws in force in the numerous countries
where it can be said to have earned income. Possibly to get
over such a difficulty rule 33 was enacted. That is how the
Revenue had proceeded in assessing the appellant.
Evidently in exercise of its power under S. 5(8) of the Act,
which says that "all officers and persons employed in the
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execution of this Act shall observe and follow the orders,
instructions and directions of the Central Board of
Revenue. . . .", the Central Board of Revenue had issued the
notification dated February 10, 1942. Under that
notification instructions had been issued to the assessing
authorities, laying down the principles to be applied in
assessing the foreign shipping companies. As regards the
British Shipping Companies, they were directed to permit
those companies "to elect to be assessed on the basis of a
ratio certificate granted by the U.’ K. authorities
regarding the income or loss and the wear and tear
allowance".
At the time that notification was issued the Act did not
provide for a development rebate. Therefore that
notification does not refer to any development rebate. But
it is made clear by that notification that a British
Shipping Company can elect to be assessed on the basis of a
ratio certificate granted by the U.K. authorities regarding
the income or loss which means the net income or net loss.
During the relevant previous years, the Act
174
provided for deduction of the development rebate in the
computation of the taxable income. During those years the
U.K. Income-tax Act provided for a similar allowance; but
that allowance was known as investment allowance. We were
informed at the bar that in those years, the percentage of
devlopment rebate allowed under the Act was the same as that
allowed under the U.K. law as investment allowance.
In about the beginning of 1964 M/s. Turner Morrison &
Co.which was the a agent of several British Shipping
Companies in India appears to have written to the Board of
Revenue seeking its advice as to how the British Shipping
Companies could claim development rebate. In reply to that
letter, the Board of Revenue wrote to them as follows
"Sub: Assessment of British Shipping Companies
on the basis of ratio certificates---Treatment
of investment allowance granted in the U.K.
I am directed to reply your letter dated 8th
Feb. 1957 on the above subject and to state
that as the development rebate which
corresponds to the investment allowance
granted in the U.K. is allowed under the In-
dian Income-tax Act from the assessment year
1956-57, there is no objection to allow the
investment allowances for the purpose of the
computation of the Indian Income of British
Shipping Companies. This would, however be
subject to the condition that the investment
allowance would be permitted as a deduction
only to the extent to which the rate of the
allowance granted in the U.K. is not greater
than the rate of development rebate allowed
under the Indian Income-tax Act."
We were informed that the copies of that letter were sent to
the Income-tax Commissioners in the various States. From
this letter, it is clear that the Board of Revenue had
instructed the taxing authorities to take into consideration
the investment allowance granted by the U.K. authorities in
computing the taxable income of the British Shipping
Companies. At this stage, it is necessary to mention that
the proviso to cl. (vib) of s. 10(2) referred to earlier was
incorporated into the Act sometime after the above
instructions were issued by the Board of Revenue.
The authorities under the Act have proceeded on the basis
that the computation of the income of the assessee has to be
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made on the second of the three bases mentioned in rule 33.
This assumption appears to be incorrect. Admittedly the
profits of the assessee company were not computed in
accordance with the provisions of the Act. That being so,
the second basis mentioned
175
in rule 33 cannot be applied. This aspect was brought to
the notice of the High Court. But the High Court refused to
consider the same on the ground that both the Revenue as
well as the assessee had proceeded before the authorities
under the Act on the assumption that the second basis
mentioned in rule 33 is the relevant basis. In our opinion
the High Court erred in adopting that approach. The fact
that the authorities under the Act as well as the parties
were under a mistaken impression cannot alter the true
position in law. It is obvious that that basis could not
have been applied. That being so the computation of the
appellant’s income-had to be made either under the first
basis viz. the calculation of the profits and gains on such
percentage of the turnover accruing or arising as the
Income-tax Officer may consider to be reasonable or on the
third basis i.e. ’in- such other manner as the Income-tax
Officer may doom suitable’.
From the assessment orders made by the Income-tax Officer,
it does not appear that in computing the taxable income of
the assessee, he adopted the first basis. The most
appropriate basis under which he could have computed the
income was the last basis viz. "in such other manner as the
Income-tax Officer may deem suitable." While adopting that
basis, the Income-tax Officer is not required to rigidly
apply the various conditions prescribed in the Act in the
matter of granting one or the other of the permissible
allowances. He may adopt any equitable basis so long as
that basis does not conflict either with rule ’- 3 or with
the instructions or directions given by the Board of
Revenue. The power given to the Income-tax Officer under
that basis is a very wide power. That power is available not
only to the Income-tax Officer but also to the Appellate
Assistant Commissioner and the Tribunal. As the Tribunal had
determined the tax due from the appellant on the basis of
the ratio certificate given by the U.K. authorities, it
cannot be said that the decision reached by the Tribunal was
an unreasonable one. The Tribunal’s decision accords with
the instructions given by the Board of Revenue.
The fact that the Proviso to s. 10 (2) (vib) was
incorporated into the Act after the Board issued its
instructions cannot affect either the validity of rule 33 or
the force of the instructions issued by the Board of Revenue
because neither rule 33 nor the instructions issued were
strictly in accordance with s. 10(2). They merely lay down
certain just and fair methods of approach to a difficult
problem.
The learned Solicitor-General appearing for the Revenue at
one stage of his arguments contended that the instructions
issued
176
by, the, Board of Revenue cannot have any binding effect and
those instructions cannot abrogate or modify the provisions
of the Act. .But he did not contend that the Rule 33 is
ultra vires the Act. The instructions, in question merely
lay down the manner of applying rule 33.
Now coming to the question as to the effect of instructions
issued under S. 5 (8) of the Act, this Court observed in
Navnit Lal C. Javeri v. K. K. Sen Appellate Asstt.
Commissioner Bombay : (1)
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"It is clear that a circular of the kind which
was issued by the Board would be binding on
all officers and persons employed in the
execution of the Act under section5(8) of the,
Act. This circular pointed, out to all the
officers that it was likely that some of the
companies might have advanced loans to their
share-holders as a result of genuine
transactions of loans, and the idea was, not
to affect such transactions and not to bring
them within the mischief of the new provison."
The directions given in that circular clearly deviated from
the Provisions of the Act, yet this Court held that the
circular was binding on the Income-tax Officer.
For the reasons mentioned I above, Civil Appeals Nos. 1161
and 1162 of 1971 are allowed and in substitution of the
answer given by the High Court to question No. 2, we answer
that question in the affirmative and in favour of the
assessee. The assessee is entitled to its costs in those
appeals both in this Court as well as in the High Court-
costs one set. Civil Appeals Nos. 2459 and 2460 of 1968 are
dismissed as being not maintainable. In those appeals,
there will be no order as to costs.
G.C. C.A.s Nos. 1161 and 1162/71 allowed.
C.A.s Nos. 2459 and 2460/68 dismissed.
(1) 56 I.T.R. 198.
177