Case: M/s. Ellerman Lines Limited Vs. Commissioner of Income Tax, West Bengal I

2. The appellant is a non-residence 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 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 were are 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 3 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 and property in the taxable territories or though or from any asset or source of income in the faxable 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 beare 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 receipt of the business, or in such other manner as the Income-tax Officer may deem suitable."3. The Income-tax Officer proceeded to assessee 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 Indian i.e. fright 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.4. 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 regard the inclusion of the destination 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 66 (1) 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 Indian should be considered as part of the Indian earnings in determining the assessees Indian income under Rule 33 of the Income-tax Rules?2. 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 computation of its total world income for the purpose of determining the assessees Indian income under rule 33 of the Income-tax Rules.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.

Reasoning:
14. 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 R. 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 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 appellants 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.15. From the assessment orders made by the Income-tax Officer, it does not appears 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 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 33 or with the intructions 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 Appellant 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 Tribunals decision accords with the instructions given by the Board of Revenue.16. The fact 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 10 (2). They merely lay down certain just and fair methods of approach to a difficult problem.17. The learned Solicitor-General appearing for the Revenue at one stage of his argument contended that the instructions issued by the Board of Revenue cannot have 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 Rule 33 is ultra vires the Act. The instructions in question merely lay down the manner of applying Ruleauthorities 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 whethere 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 assessees 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 different 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.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 dealing with the levy ofare not identical in all countries. It may well night 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.We were informed that the copies of that letters were sent to theCommissioners 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 Section 10 (2) referred to earlier was incorporated into the Act sometime after the above instructions were issued by the Board of Revenue.