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PETITIONER: ELLERMAN LINES LTD.

       Vs.

RESPONDENT: C.I.T. WEST BENGAL, CALCUTTA

DATE OF JUDGMENT22/10/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. GROVER, A.N.

CITATION:  1972 AIR  524            1972 SCR  (2) 168  CITATOR INFO :  RF         1981 SC1922  (11,12)  RF         1992 SC1360  (9)

ACT:      Income-tax  Act,  1922,  ss.  5(8),  10(2)(vib)--Indian Income-tax  Rules,    1922,  r.  33--Non-resident   shipping company--Computation  of turnover--Ratio certificate  issued by  U.K.  Chief  Inspector of  Taxes  mentioning  investment allowance  granted by U.K. authorities--In assessing  Indian income  of  non-resident whether such  investment  allowance (corresponding  to  development  rebate  under  India   Act) whether  to be taken into consideration--Effect of  circular by Central Board of Revenue.

HEADNOTE: Under  a  circular issued in 1962 by the  Central  Board  of Revenue under s. 5(8) 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 U.K. 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  U.K. 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  U.K. which were based on the assessments made on  the appellant  in  U.K.  In  making  assessment  the  Income-tax Officer  purported to.proceed 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

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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 i.e. ’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 U.K.  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 s. 10(2) (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 s. 10(2). [175 G-H] Navnit  Lal  C.  Javeri  V.  K.  K.  Sen,  Appellate  Asstt. Commissioner, Bombay, 56 I.T.R. 198, applied.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION:Civil Appeals Nos.  2459  and 2460 of 1968 and 1161 and 1162 of 1971. Appeals  by certificate/special 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-

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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 CI/72 170 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,  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 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 ie.freight  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. 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

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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 s. 66(1) of the Act.               "  1  .  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  U.K.   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 U.K. 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 ss. 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 10(2) 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:

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             "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               Electricity  (Supply) Act, 1948 (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 S. 4 of s. 10(2).   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 S. 5(8) of the Act, which  says that "all officers and persons employed  in  the

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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 U.K. 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 U.K.  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 U.K. law as investment allowance. In  about  the  beginning of 1964 M/s.   Turner  Morrison  & Co.which  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 U.K.               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 U.K. 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 U.K. 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 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 s. 10(2) 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

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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 i.e. ’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  U.K.  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  s.  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 s. 10(2). 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  S. 5 (8) of the Act, this Court  observed  in Navnit  Lal  C.  Javeri  v.  K.  K.  Sen  Appellate   Asstt. Commissioner Bombay : (1)

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             "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 section5(8) 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. G.C.                 C.A.s Nos. 1161 and 1162/71 allowed.                      C.A.s Nos. 2459 and 2460/68 dismissed. (1) 56 I.T.R. 198. 177