Case: M/S Wilh Wilhelmsen Vs. Commissioner Of Income Tax,West Bengal

Three questions were referred under Section 66(2) of the Act at the instance of the Revenue. The questions are"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to get depreciation allowance under Rule 8 of the Income Tax Rules even in respect of ships which had formed part of the assessee s fleet for more than twenty years?2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting the addition of Rs 55, 280 made by the Appellate Assistant Comissioner on account of excess depreciation in respect of the vessel Tortugas?3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the enhancement of Rs 97, 547 to the total income made by the Appellate Assistant Commissioner on account of wrong deduction of unabsorbed depreciation allowed by the Income Tax Officer ?" *2. The Calcutta High Court answered Question 1 in the negative, i. e., in favour of the Revenue. Question 2 was answered in the affirmative, i. e., in favour of the assessee, while Question 3 was answered in the negative, i. e., in favour of the Revenue and against the assessee. On an application filed by the assessee for issuance of a certificate under Section 66-A(2), the High Court (a different Division Bench) issued the certificate observing that the case raises certain important questions of law which require to be considered by this Court. The questions so indicated are"The issue involved in this reference concerns the interpretation of the circular and the instructions issued by the Central Board of Revenue vis-gvis the applicability of Rule 33 of the Income Tax Rules. The answers involve the question of vital importance for the assessment of shipping companies up to the Assessment Year 1976-77 and how Section 44-B would be applicable. The reference dealt with the question whether a shipping company is entitled to depreciation under Section 10(2) (vi) ofthe Income Tax Act, 1922 in view of the instructions issued by the Central Board of Revenue. This reference was also involved with the question whether the assessee would become disentitled to such depreciation in view of the said instructions contained in the circular of the Central Board of Revenue. It is true that the scope and effect of the circular of this type have been considered by the Supreme Court in the case of Ellennan Lines Ltd. v. CIT and Navnit Lcrl C. Javeri v. K. K. Sen2, but the question here is to what extent a circular which curtails the right of the assessee under the Act or the Rule can be given effect to as against the assessee. It is true, as was noted by the Supreme Court in the cases referred to hereinbefore as also in the instant case that circulars merely provide a method of the application of Rule 33, but by providing that method if the circular attempts to curtail the right to depreciation by the assessee then the jurisdiction of such circulars to curtail right granted either by the Act or the Rule framed by the Act would require consideration. Furthermore also on the interpretation of the circular there is a substantial question involved - what does the expression fleet in the instructions issued by the Central Board of Revenue mean. For the aforesaid reasons we are of the opinion that this case involves substantial and important questions of law which require to be considered by the Supreme Court." *3. The appellant-assessee is a Norwegian Shipping Company. The assessment year concerned is 1958-59 for which the accounting year was the calendar year 1957. The relevant facts, as stated in the judgment of the High Court, are the following(i) Instead of furnishing the annual accounts for its world business for the Assessment Year 1958-59, the assessee furnished separate complete annual accounts for its Indian trade, that is to say, for all-round voyages of each ship to and from the Indian ports. The assessment was made under the third method contained in Rule 33 of the Indian Income Tax Rules, 1922 and the Instructions issued thereunder. The profits that were brought to tax ultimately were the net Indian profits of each ship employed in the Indian trade in the Accounting Year 1957(ii) Following the Instructions aforementioned, the Income Tax Officer disallowed depreciation of eight ships mentioned in his order on the ground that the said ships in the assessees fleet were of more than twenty years(iii) There was an unabsorbed depreciation of about Rs 3, 31, 493 in the Assessment Year 1953-54. An amount of Rs 2, 49, 093 was set off against the assessees income for the Assessment Year 1957-58. The unabsorbed depreciation of Rs 97, 547 for the Assessment Year 1953-54 pertained to seven ships, which did not come to India in the accounting year relevant to the Assessment Year 1958-59. In the books of the assessee, the said sum of Rs. 97, 547 was shown as a business loss brought forward from the earlier years. The Income Tax Officer allowed the assessee to set off the said amount against the profits for the accounting year relevant to Assessment Year 1958-59. (we are not stating the facts relating to Question 2 since it was answered by the High Court in favour of the assessee and because there is no appeal by the Revenue against) On appeal, the Appellate Assistant Commissioner affirmed the order of the Income Tax. Officer. Before the Appellate Assistant Commissioner, the Income Tax Officer contended tbat allowing tfie set- off of Rs. 97, 547 by him 7 was a mistake. The assessee accepted the said contention, Accordingly, the Appellate Assistant Commissioner enhanced the assessment by disallowing the said sum of Rs 97, 547(V) The assessee appealed to the Tribunal where it contended that the Instructions insofar as they provide for disallowance of depreciation on the said eight ships (which did not come to India during the accounting year relevant to Assessment Year 1958-59) were ultra vims proviso (c) to Section 10(2) (vi) of the Act and Rule 8 of the Indian Income Tax Rules, 1922. It contended that it is entitled to depreciation in respect of all these ships under the provisions contained in Section 10(2) (vi) proviso (c) and Rule 8. It submitted further that the words "companys fleet" occurring in Instructions were referable only to those ships of the assessee which were employed in its Indian trade4. The Tribunal did not go into the question whether the Instructions were ultra vims the statutory provisions aforesaid but held that the Appellate Assistant Commissioner has misunderstood the said Instructions. It allowed the assessies appeal on the following reasoning"When the depreciation is allowed under the Indian Income Tax Act it follows that in the matter of calculating the overall or total depreciation for the purpose of proviso (c) to Section 10(2) (vi) one has also to take into account only such depreciation as has been actually allowed under the Indian Income Tax Act. As such we are not concerned with any notional depreciation or depreciation which might have been provided, in the accounts other than those relevant for the purpose of assessment under the Indian Income Tax Act. This, to our mind, seems to be the most patent and obvious interpretation of Section 10(2) (vi). In the case of the present assessee which is assessed on the round voyage method, a particular ship might have called at the Indian port some 25 years back and may be employed for the companys Indian trade for the second time only in the 26th year. That does not mean that the company will not be entitled to depreciation in the 26th year because in the intervening 25 years the ship was evidently not used for purpose of the round voyage via India and as such no depreciation had been allowed under the Indian Income Tax Act except for the first yearIn the case of a foreign shipping company like that of the appellant company there may be ships which are home more than 20 years on the total world fleet and many of the ships might not have been used at ail in. the Indian waters but there is no prohibition under the Indian Income Tax Act against allowing depreciation on such ships simply on the ground that the ship had formed a part of the companys fleet for more than 20 years. We, therefore, hold in favour of the appellant company viz. that depreciation allowance as provided in Rule 8 should be allowed on all ships employed in connection with the companys Indian trade subject only to the limitation imposed under proviso (c) to Section 10(2) (vi)5. The Tribunal further held that the said Instructions which may have been valid when issued, became obsolete in view of the introduction of Section 24(2) in the Act by the Finance Act, 1955. It found that inasmuch as the assessee carried on the same business in the relevant assessment year as was carried in the previous relevant years, the assessee is entitled to set off the unabsorbed depreciation of Rs 97, 547 against the profits of the Assessment Year 1958-596. We may now set out the opinion of the High Court on the three questions referred. On the first question, the High Court held that the Instructions are not inconsistent with the provisions of the Act or the Rules. They provide for assessment of total income of a foreign shipping company where it furnishes annual accounts for the whole of its business, Indian and foreign, as well as where it furnishes the accounts only in respect of its Indian trade. By following the latter method, the foreign shipping company cannot get depreciation allowance more than it is entitled to in the former method. The Instructions are clear. There is no ambiguity therein. Depreciation on a ship is allowed only when it is actually employed in the trade or business. From Appendix-A to Rule 8, it appears that for the purposes of depreciation allowance, the legislature has contemplated twenty years to be the normal expectation of the life of a ship. The order passed by the Income Tax Officer is consistent with the said provisions. The instructions merely clarify the rule position. Whether statutory or not, they are binding upon the Income Tax authorities, having been issued under sub-section (8) of Section 5 of the Act7. On Question 3, the High Court held that inasmuch as ships in respect of which the unabsorbed depreciation was sought to be carried forward did not come to India during the accounting year relevant to Assessment Year 1958-59 the said amount of Rs 97, 547 cannot be set off against the profits of the said assessment year. (We are not setting out the opinion of the High Court on Question 2, since the said question is not in issue before us.)

Reasoning: 10. The provision is clear. It requires no elaboration. It is, however, evident that the power so conferred on Central Board of Revenue has to be exercised for the purposes of and within the four corners of the Act14. It would be evident from a perusal of the above provisions that Section 10(2) (vi) does not specifically provide for allowance of depreciation on foreign ships trading with India. Rule 33 also does not specifically provide for the situation except that the last portion of the rule empowers the Income Tax Officer to arrive at the actual amount of income, profits or gains accruing or arising to any person residing outside taxable territories in such other manner as he deems suitable where such ascertainment cannot be done according to the first two methods indicated therein. It is precisely to provide for certain specific situations that the Central Board issued the aforesaid Instructions under Rule 33. The Instructions specifically lay down the method and the manner in which depreciation has to be worked out on ships owned by a foreign shipping line carrying on business in British India. In this case, it is admitted that the appellant-company did not prepare and furnish the complete annual accounts for its entire business, Indian and foreign, along with an account of its gross receipts, Indian and foreign. It kept a separate annual account in respect of its Indian trade and submitted the same to the Income Tax authorities. The Instructions provide inter alia for such a situation as well. The Instructions issued by the Central Board under Rule 33 merely elucidate and elaborate the manner in which the business income of-such foreign shipping lines are to be ascertained. These Instructions are relatable to the last/third alternative provided by Rule 33. We are, therefore, in agreement with the High Court that the aforesaid Instructions do not run counter to Rule 33 or for that matter to Section 10(2) (vi). Evidently, these Instructions were issued in view of the problems faced and experience gained by the department and to meet situations not expressly provided for by the Act or the Rules. They are in the nature of guidance to the assessing officers. We are also in agreement with the High Court that the Instructions are clear and unambiguous and that the Income Tax Officer was bound to follow them. The Instructions specifically provided that depreciation must be allowed on each ship employed in the Indian trade in a given year and that the allowance must be a proportion of the annual. rate calculated with reference to the number of days spent in the Indian trade whether at sea or in harbour. They further provided that any unabsorbed depreciation in any year must be distributed among the ships in the Indian trade in that year in proportion to the capital cost of each ship and that the unabsorbed depreciation thus allotted to any ship can only be allowed in any subsequent year against the same ship. The Instructions also provide clearly that the allowance shall cease on ships after the expiry of twenty years. It is not disputed by the learned counsel for the assessee before us that the Instructions have been correctly understood or followed by the Income Tax Officer. The complaint rather is that the Instructions themselves are inconsistent with the statutory provisions. Since we have held that the Instructions are not inconsistent with nor can be said to be outside the purview of Rule 33 read with Section 5(8) of the Act, no further question arises. Accordingly, we affirm the answer given by the High Court to Question 115. So far as Question 3 is concerned, the answer to it also depends upon the validity and applicability of Instructions aforesaid. It has been found by the High Court that the seven ships, the unabsorbed depreciation whereof was sought to be set off in the Assessment Year 1958-59, did not come to India in the Accounting Year 1957 relevant to the Assessment Year 17958-59. According to the Instructions, the unabsorbed depreciation in respect of a particular ship. can only be allowed against that particular ship in a subsequent year provided that it was employed in the Indian trade in the subsequent year. Accordingly, we affirm the answer given by the High Court to Question 3 as wellSince we have held that the Instructions concerned herein are relatable to Rule 33, it is not necessary to go into the question whether the power conferred upon the Central Board to issue instructions can be employed for issuing instructions contrary to the Act and the Rules. Obviously it cant be so used - an aspect already dealt by us hereinaboveFor the reasons given above, this submission does not carry the appellants case any further17. Now, a word about the order of the High Court granting certificate. The order granting certificate raises certain questions which do not directly arise from the judgment of the High Court. The order granting certificate seems to assume that the Instructions are inconsistent with the statutory provisions which assumption, in our respectful opinion, is not warranted, as has been indicated by us hereinabove