Full Judgment Text
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PETITIONER:
NETHERLANDS STEAM NAVIGATION COMPANY LTD.
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME-TAX, WEST BENGAL
DATE OF JUDGMENT:
14/03/1969
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
RAMASWAMI, V.
CITATION:
1969 AIR 1262 1970 SCR (1) 1
1969 SCC (2) 84
ACT:
Income-tax Act 1922 section 10(2) (vi-a)-Non-resident-
Company -Taxable profits computed by special formula evolved
by Income-tax Officer and not under second method in rule 33
Income-tax Rules of 1922-Whether initial and additional
depreciation admissible.
HEADNOTE:
The appellant is a non-resident shipping company with its
local office in Calcutta. For its assessment to income-tax
for the years 1952-53 to 1956-57 the appellant filed returns
disclosing taxable income computed on the basis of its
annual turn-over in its Indian trade but did not furnish
particulars of its world income. The Income-tax Officer
computed the taxable business income for each year by
application of a special formula which was accepted by the
appellant. However, in computing the income, the Income-tax
Officer only allowed normal depreciation and other trade
allowances admissible under the income-tax Act 1922 and did
not allow any initial depreciation or additional
depreciation in respect of the ships of the appellant in any
of the assessment years, because the ships acquired by the
appellant were not introduced into the Indian business in
the years in which they were newly acquired. The, orders of
assessment were confirmed by the Appellate Assistant
Commissioner but the Tribunal held that in respect of all
the four ships, additional depreciation wag ’admissible
under section 10(2) (vi-a) of the Act, as claimed. The High
Court, on a reference, answered the question against the
assessee.
HELD : Additional depreciation was not admissible to the
appellant as an allowance in the computation of the taxable
income by the special formula adopted by the Income-tax
Officer.
It was common ground that the, appropriate method for
determining the profits was the second method in r. 33. But
that method was never applied; if it was applied in the
computation of the world profits of the assessee, it would
have been necessary to allow the various depreciation
allowances. The assessee could not, while accepting
determination of taxable profits in a manner not warranted
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by the second method under r. 33, claim that additional
depreciation should be allowed. [8 E]
The Supreme Court in the present appeal was exercising an
advisory jurisdiction and could not decide whether the
computation of taxable income by the Incometax Officer by
the application of the formula evolved by him was correct.
Additional depreciation is a statutory allowance in the
determination of taxable profit under s. 10 of the Act, and
in the case of a non-resident where, actual income cannot be
determined, and resort is had to r. 33, not when an
empirical method is adopted for computation of the taxable
income. [7 H]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1622 to
1626 of 1968.
Appeals from the judgment and order dated February 11, 1964
of the Calcutta High Court in Income-tax Reference No. 109
of 1960.
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Sachin Chaudhuri, T. A. Ramachandran and D. N. Gupta, for
the appellant (in all the appeals).
S. T. Desai, S. A. L. Narayan Rao, R. H. Dhebar, R. N.
Sachthey and B. D. Sharma, for the respondent (in all the
appeals).
The Judgment of the Court was delivered by
Shah, J. Netherlands Steam Navigation Company Ltd.-
hereinafter called "the assessee"-is a non-resident Company
engaged in shipping business. For the assessment years
1952-53 to 1956-57 the assessee filed its return of income
for the relevant accounting years disclosing taxable income
computed on the basis of its annual turnover in its Indian
trade i.e. "round voyages" to and from Indian Ports. The
assessee did not furnish particulars of its world income.
The Income-tax Officer computed the taxable business income
of the assessee for each year by the application of the
following formula:
Indian trade profits x Indian Port receipts
--------------------
Total Port receipts
By the expression "Indian trade profits" in the formula was
meant profit earned in "round voyages" made by the
assessee’s ships which touched Indian ports. Operation of
the formula may be illustrated by taking a sample
computation by the Income-tax Officer for the year 1953-54 -
Kr. Kr.
"Total gross earning in Indian
Trade 10,024,996
Deduct:--
(1) Total experience in Indian
Trade 7,705,474
(2) Depreciation allowance 733,671 8,439,145
Net profit India Trade 1,585,851
Gross earning from
Indian Ports 5,440,042
Proportionate Indian Profits:---
5,440,042
-----------* 1,585,851 860,559
100,024,996
(Rs.100=Kr.79.80 Rs.10,78,395"
In computing the profits of the assessee in India in each
year the Income-tax Officer allowed normal depreciation and
other trade allowances admissible under the Indian Income-
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tax Act, 1922, and the relevant rules made thereunder. He,
however, did not allow initial depreciation and additional
depreciation in respect of the ships of the assessee in any
of the assessment years, because the ships acquired by the
assessee were not introduced into the Indian business in the
years in which they were newly acquired. ’The orders of
’assessment were confirmed by the Appellate Assistant
Commissioner.
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In appeal to the Income-tax Appellate Tribunal the assessee
claimed Additional depreciation for four ships for which the
following details were furnished:
"(1) S. S. Bintang Brought into use in 1950.Brought into
use in the Indian trade in 1951.
Claim for the assessment years 1952-53
to 19-54-55.
(2) S. S. Billiton Brought into use in 1951. Brought into
use in the Indian trade in 1952. Claim
for the Assessment years 1953-54 to
1956-57.
(3) S, S. Banka Brought into use in 1953. Brought into
use in the Indian trade in 1954. Claim
for the assessment years 1955-56 and
1956-57.
(4) S. S. Bawean Brought into use in 1953. Brought into
use in the Indian trade in 1954. Claim
for the assessment years 1955-56 and
1956-57."
The assessee and the Commissioner were agreed that the
taxable income of the assessee had to be determined by the
application of the second method in Rule 33 of the Indian
Income-tax Rules, 1922. The Tribunal also observed that the
Commissioner and the assessee agreed that the formula
adopted by the Income-tax Officer was "the correct method of
assessment".
The Commissioner submitted before the Tribunal that if the
Indian business of the assessee be regarded as part of its
world business and not independent of it, the world profits
of the assessee must be computed according to the provisions
of the Indian Income-tax Act, 1922, and additional
depreciation may be taken into account in determining the
taxable profits under the Indian Income-tax Act as a
fraction of the world profits. But he maintained that if
the Indian trade be regarded as a separate business and not
part of the world trade of the assessee, additional depre-
ciation could only be allowed under S. 10(2)(vi-a) of the
Indian Income-tax Act, provided ships which are new are
introduced into the Indian trade and not otherwise,
In the opinion of the Tribunal, in computing the taxable in-
come of the assessee under the Indian Income-tax Act, 1922,
the Indian business must be taken to be part of the
assessee’s world business, and "depreciation which the
assessee was entitled to, in respect of its world business
by the application of the Indian Income-tax Act would be
proportionately available in respect of its Indian
business." The Tribunal observed that under r. 33 "the
profits have to be calculated under the terms of the Indian
Incometax Act and this act postulated that on all machinery,
plants and such other things like steamers brought into
business after March 31, 1948, additional depreciation must
also be granted". The
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Tribunal then observed that the ships brought into the
Indian trade were not new in the years of account relevant
to the five years of assessment, but the assessee was still
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qualified under S. 10(2) (vi-a) to additional depreciation
for a continuous period of five years, and "the fact in the
first of these years the new ships did not call at the
Indian Ports in one assessment year did not disentitle the
assessee to the benefit not only for that year but also for
the succeeding four years". Accordingly the Tribunal held
that in respect of all the four ships of the assessee,
additional depreciation was admissible as claimed.
At the instance of the Commissioner of Income-tax, the fol-
lowing question was referred by the Tribunal to the High
Court of Calcutta for opinion in respect of each of the five
years :
"Whether on the facts and circumstances of the case the
assessee-Company is entitled to additional depreciation in
respect of the four ships mentioned above?"
The High Court answered the question in the negative
Clause (vi-a) was inserted in s. 10(2) of the Indian Income-
tax Act, 1922, by s. 11 of the Taxation Laws (Extension to
Merged States and Amendment) Act 67 of 1949. The clause as
amended by s. 8 of the Indian Income-tax (Amendment) Act 25
of’ 1953 with effect from April 1, 1952, reads as follows :
"In respect of depreciation of buildings newly
erected, or of machinery or plant being new
which has been installed, after the 31st day
of March, 1948, a further sum (which shall be
deductible in determining the written down
value) equal to the amount admissible under
clause (vi) (exclusive of the extra allowance
for double or multiple shift working of the
machinery or plant and the initial
depreciation allowance admissible under that
clause for the first year of erection of the
building or the installation of the machinery
or plant) in not more than five successive
assessments for the financial years next
following the previous year in which such
buildings are erected and such machinery and
plant installed and falling within the period
commencing on the 1st day of April, 1
949, and
ending on the 31st day of March, 1959."
The assessee is a non-resident Company. It maintains a
Branch Office in Calcutta; but on that account the’ Indian
business of the assessee cannot be regarded as business
distinct from its world business. It was not so treated by
the Income-tax Officer, or by the Appellate Assistant
Commissioner. In computing profits or gains of business
carried on by an assessee, normal depreciation
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under, S. 10(2)(vi) and additional depreciation under S.
10(2)(vi-a) are undoubtedly admissible in the conditions and
to the extent allowed under the two clauses.
By S. 4(1) of the Indian Income-tax Act, the total income of
any previous year of a non-resident includes all income,
profits and gains from whatever source derived which-
(1) are received or are deemed to be received in the tax-
able territories in such year by or on behalf of such
person, and
(2) which accrue or arise or are deemed to accrue or arise
to him ’in the taxable territories during such year.
Section 10 of the Act which charges to tax the profits and
gains of business, profession or vocation carried on by an
assessee applies to assessees who are residents, residents
but not ordinarily resident, and non-residents. Profits and
gains of business of a non-resident received or deemed to be
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received in the taxable territories by or on behalf of the
assessee are taxable under the Indian Income Tax Act 1922 :
profits and-gains of business which accrue or arise or are
deemed to accrue or arise to him in the taxable territories
are also taxable under that Act; but profits and gains which
accrue or arise or are deemed to accrue or arise to a non-
resident without the taxable territories are not taxable
under the Act.
Section 4 is one of the pivotal sections in the scheme of
the Income-tax Act. Thereby within the total income of a
non-resident is included income received, arising or
accruing, or deemed to be received, or to have arisen or
accrued, -within the taxable territories. The Act however
gives no clear guidance for determining when income may be
said to have arisen or accrued within the taxable
territories. But r. 33 framed under the Act purports to
give some direction to the Income-tax Officer for
determining income, profits or gains accruing or arising to
a non-resident for the purpose of assessment to income-tax.
There is no dispute that the profits of the business taxable
under the Indian Income-tax Act, 1922, are a fraction of the
world-profits-and the profits are to be determined under r.
33 of the Income-tax Rules. Rule 33 of the Income-tax Rules
reads as follows :
"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 asset or, source
of income in the taxable territories, or through or from any
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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 with the
provisions of the Indian Income-tax Act) as
the receipts so accruing or arising bear to
the total receipts of the business, or in such
other manner as the Income-tax Officer may
deem suitable."
The rule authorises the Income-tax Officer to adopt one of
the three methods of determining income, profits or gains’-
?Or the purpose of assessment to income-tax where the
Income-tax Officer is unable to ascertain the actual amount
of income, profits or gains, arising inter-alia out of a
business connection in the taxable territories :-(a) a
percentage of turnover considered reasonable (b) a
proportion of the total profits (computed according to the
provisions of the Indian Income Tax Act) of the business of
the assessee equal to the proportion which the receipts
accruing or arising bear to the total receipts of the
business and (c) such other manner as the Income-tax Officer
may deem suitable.
The second method, it was common ground, was properly
applicable to the determination of taxable income of the
assessee. That method requires as a first step,
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determination of the total profits of the business of the
assessee in accordance with the provisions of the Indian
Income-tax Act: the next step is to determine the proportion
between the receipts accruing or arising within the taxable
territories and the total -receipts of the business; and the
third step is to determine the income, profits or gains by
the application of the proportion for the purpose of
assessment to income-tax. This method ordains that the
fraction which the total profits bear to the total world
receipts is to be applied to the Indian receipts for
determining the taxable profits. The income so determined
will be the taxable income without any further allowances,
because the permissible allowance will all -enter the
computation of the world income and income taxable under the
Income-tax Act is also a fraction thereof.
Apparently the Income-tax Officer did not apply the second
method under r. 33 in computing the taxable income of the
assessee, for under that method in determining the taxable
income the receipts accrued or arising in India had to be
multiplied by the proportion between the total profits of
the business and the total receipts of the world business.
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Counsel for the assessee asked us to assume that the profits
computed by the Income-tax Officer according to the formula
adopted by him are profits determined by the second method
in r. 33, and claimed on that footing that beside normal
depreciation, additional depreciation ought also to have
been taken into account, and the taxable profits of the
assessee determined on that basis. But that assumption
cannot be made. One of the essential conditions of the
applicability of the second method in r. 33 is the
determination of the total world profits of the assessee
under the Indian Income-tax-Act, and reduction of the Indian
taxable profits by the application of the appropriate
fraction. The assessee has not produced its books of
account of its world trade to enable the Income-tax Officer
to determine its total taxable profits arising from its
world business.
There was apparently no clear appreciation of the true im-
port of the second method under r. 33 before the
Departmental Authorities and the Tribunal. Counsel for the
assessee suggested that his client may be willing to produce
before the Income-tax Officer the books of account of the
relevant years for computing the total world profits
according to the Indian Income-tax Act, 1922, and the
benefit of additional depreciation may then be allowed to
the assessee in computing the total profits under the Indian
Income-tax Act. Counsel for the Commissioner expressed his
willingness to the adoption of that course. Counsel
requested us to adjourn the hearing to enable them to obtain
instructions from their respective clients, and the hearing
was accordingly adjourned for three weeks. But ultimately
counsel for the assessee informed us that his clients may
not be able to bring before the Income-tax Officer the books
of account of their world trade.
The Income-tax Officer has evolved a special formula for de-
termining the profits which is not the second method in r.
33 of’ the Income-tax Rules. The assessee has not
challenged the correctness of that method, nor has the
Department. In the application of that formula, normal
depreciation and trade expenses are deducted from the total
gross earning in the Indian trade, but not the additional
depreciation.
Clearly the Income-tax Officer did not in computing the tax-
able income resort to the second method in r. 33 of the
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Incometax Rules. We are exercising in these appeals
advisory jurisdiction, and are only called upon to answer
the question referred by the Tribunal. We are incompetent
to decide whether computation of the taxable income by the
Income-tax Officer by the application of the formula evolved
by him is correct: that question is not before us. We are
only concerned to determine the validity of the claim for
admitting additional depreciation in the computation of the
taxable income of the assessee by the method -adopted
8
by the Income-tax officer. Additional depreciation is a
statutory allowance in the determination of taxable profit
under S. 10 of the Act, and in the case of a non-resident
where actual income cannot be determined, and resort is had
to r. 33, not when an empirical method is adopted for
computation of the tax-able income.
We are however unable to agree with the observations of the
High Court that "no relief in any shape or form can be
enjoyed by any assessee under the Indian Income-tax Act in
respect of a source of income, unless the income from that
source is taken into consideration for the purpose of that
Act. In the reference before us the income in question was
outside the purview of assessment under the Indian Income-
tax Act". That was not the plea of the Commissioner. The
source of the income of the assessee charged to tax was
business: it was not income from any other source. The
Commissioner and the assessee were ad idem on that matter.
The only dispute was whether additional depreciation was
admissible in the computation of the taxable income, when
the taxable business profits were determined by the Income-
tax Officer by the method evolved by him.
It was common ground that the appropriate method for deter-
mining the profits was the second method in r. 33. But that
method was never applied: if it was applied in the
computation of the world profits of the assessee, it would
have been necessary to allow the various depreciation
allowances. The assessee could not, while accepting
determination of taxable profits in a manner not warranted
by the second method under r. 33, claim that additional
depreciation should be allowed. The answer to the question
therefore is that additional depreciation is not admissible
as an allowance in the computation of the taxable income by
the special formula adopted by the Income-tax Officer.
The appeals fail. The assessee will pay the costs of these
appeals. One hearing fee.
R.K.P.S. Appeals
dismissed.
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