Appeals Nos 2459 and 2460 of 1968 and 1161 and 1162 of 1971
Appeals by certificatespecial 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 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 CI72 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 UK which were based on the assessments made on the appellant in UK During the relevant period there was in UK 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 iefreight 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 UK 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 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 section 661 of the Act
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 UK 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 UK 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 sections 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 102 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 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 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 section 4 of section 102
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 section 58 of the Act which says that all officers and persons employed in the 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 UK 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 UK 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 UK law as investment allowance
In about the beginning of 1964 Ms Turner Morrison  Cowhich 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 UK
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 UK 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 UK 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 UK 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 section 102 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 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 ie 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 UK 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 section 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 section 102
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 section 5 8 of the Act this Court observed in Navnit Lal C Javeri vs K K Sen Appellate Asstt
Commissioner Bombay  1 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 section58 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
GC CAs Nos
1161 and 116271 allowed
CAs Nos
2459 and 246068 dismissed


Summary:
Under a circular issued in 1962 by the Central Board of Revenue under section 58 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 UK 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 UK 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 UK which were based on the assessments made on the appellant in UK
In making assessment the Income tax Officer purported toproceed 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 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 ie 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 UK 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 section 102 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 section 102
175 G H Navnit Lal C Javeri V K K Sen Appellate Asstt
Commissioner Bombay  applied