Case: Netherlands Steam Navigation Company Ltd Vs. The Commissioner Of Income-Tax, West Bengal

method, it was common ground, was properly applicable to the determination of taxable income of the assessee. That method requires as a first step, 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.11. Apparently the Income-tax Officer did not apply the second method under Rule 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.12. 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 Rule 33, and claimed on that footing that besides 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 Rule 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.13. There was apparently no clear appreciation of the true import of the second method under Rule 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 client may not be able to bring before the Income-tax Officer the books of account of their world trade.14. The Income-tax Officer has evolved a special formula for determining the profits which is not the second method in Rule 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.15. Clearly the Income-tax Officer did not in computing the taxable income resort to the second method in Rule 33 of the Income-tax 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 by the Income-tax Officer. Additional depreciation is a statutory allowance in the determination of taxable profits under Section 10 of the Act, andin the case of a non-resident where actual income cannot be determined, and resort is had to Rule 33, not when an empirical method is adopted for computation of the taxable income.16. 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.17. It was common ground that the appropriate method for determining the profits was the second method in Rule 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 Rule 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.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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 under Section 10 (2) (vi) and additional depreciation under Section 10 (2) (vi-a) are undoubtedly admissible in the conditions and to the extent allowed under the two clauses.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, 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.11. Apparently the Income-tax Officer did not apply the second method under Rule 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 worldthat assumption cannot be made. One of the essential conditions of the applicability of the second method in Rule 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.The Income-tax Officer has evolved a special formula for determining the profits which is not the second method in Rule 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.15. Clearly the Income-tax Officer did not in computing the taxable income resort to the second method in Rule 33 of the Income-tax 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 by the Income-tax Officer. Additional depreciation is a statutory allowance in the determination of taxable profits under Section 10 of the Act, andin the case of a non-resident where actual income cannot be determined, and resort is had to Rule 33, not when an empirical method is adopted for computation of the taxable income.16. 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.17. It was common ground that the appropriate method for determining the profits was the second method in Rule 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 Rule 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-taxt assumption cannot be made. One of the essential conditions of the applicability of the second method in Rule 33 is the determination of the total world profits of the assessee under the IndianAct, 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 theOfficer to determine its total taxable profits arising from its world business.