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PETITIONER: NETHERLANDS STEAM NAVIGATION COMPANY LTD.

       Vs.

RESPONDENT: THE COMMISSIONER  OF INCOME-TAX, WEST BENGAL

DATE OF JUDGMENT: 14/03/1969

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V.

CITATION:  1969 AIR 1262            1970 SCR  (1)   1  1969 SCC  (2)  84

ACT: Income-tax  Act  1922  section  10(2)   (vi-a)-Non-resident- Company -Taxable profits computed by special formula evolved by Income-tax Officer and not under second method in rule 33 Income-tax  Rules  of 1922-Whether  initial  and  additional depreciation admissible.

HEADNOTE: The  appellant is a non-resident shipping company  with  its local office in Calcutta.  For its assessment to  income-tax for the years 1952-53 to 1956-57 the appellant filed returns disclosing  taxable  income  computed on the  basis  of  its annual  turn-over  in its Indian trade but did  not  furnish particulars  of  its world income.  The  Income-tax  Officer computed  the  taxable  business income  for  each  year  by application  of a special formula which was accepted by  the appellant.  However, in computing the income, the Income-tax Officer  only  allowed normal depreciation and  other  trade allowances admissible under the income-tax Act 1922 and  did not   allow   any   initial   depreciation   or   additional depreciation in respect of the ships of the appellant in any of  the assessment years, because the ships acquired by  the appellant  were not introduced into the Indian  business  in the years in which they were newly acquired.  The, orders of assessment   were  confirmed  by  the  Appellate   Assistant Commissioner  but the Tribunal held that in respect  of  all the  four  ships, additional  depreciation  wag  ’admissible under section 10(2) (vi-a) of the Act, as claimed.  The High Court,  on  a reference, answered the question  against  the assessee. HELD  :  Additional depreciation was not admissible  to  the appellant as an allowance in the computation of the  taxable income  by  the special formula adopted  by  the  Income-tax Officer. It  was  common  ground that  the,  appropriate  method  for determining the profits was the second method in r. 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

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by the second method under r. 33,   claim  that   additional depreciation should be allowed. [8 E] The  Supreme Court in  the present appeal was exercising  an advisory  jurisdiction  and  could not  decide  whether  the computation  of taxable income by the Incometax  Officer  by the  application of the formula evolved by him was  correct. Additional  depreciation  is a statutory  allowance  in  the determination of taxable profit under s. 10 of the Act,  and in the case of a non-resident where, actual income cannot be determined,  and  resort  is  had to  r.  33,  not  when  an empirical  method is adopted for computation of the  taxable income. [7 H]

JUDGMENT: CIVIL  APPELLATE  JURISDICTION: Civil Appeals Nos.  1622  to 1626 of 1968. Appeals from the judgment and order dated February 11,  1964 of  the Calcutta High Court in Income-tax Reference No.  109 of 1960.                     2 Sachin  Chaudhuri, T. A. Ramachandran and D. N.  Gupta,  for the appellant (in all the appeals). S.   T.  Desai,  S. A. L. Narayan Rao, R. H. Dhebar,  R.  N. Sachthey  and B. D. Sharma, for the respondent (in  all  the appeals). The Judgment of the Court was delivered by Shah,   J.  Netherlands  Steam  Navigation   Company   Ltd.- hereinafter called "the assessee"-is a non-resident  Company engaged  in  shipping business.  For  the  assessment  years 1952-53  to 1956-57 the assessee filed its return of  income for the relevant accounting years disclosing taxable  income computed  on the basis of its annual turnover in its  Indian trade  i.e. "round voyages" to and from Indian  Ports.   The assessee  did not furnish particulars of its  world  income. The Income-tax Officer computed the taxable business  income of  the  assessee for each year by the  application  of  the following formula: Indian trade profits x Indian Port receipts                       --------------------                       Total Port receipts By the expression "Indian trade profits" in the formula  was meant   profit  earned  in  "round  voyages"  made  by   the assessee’s  ships which touched Indian ports.  Operation  of the   formula  may  be  illustrated  by  taking   a   sample computation by the Income-tax Officer for the year 1953-54 -                                    Kr.          Kr. "Total gross earning in Indian  Trade                                         10,024,996 Deduct:-- (1) Total experience in Indian     Trade                        7,705,474 (2) Depreciation allowance       733,671       8,439,145     Net profit India Trade                     1,585,851     Gross earning from     Indian Ports                               5,440,042     Proportionate Indian Profits:---       5,440,042      -----------* 1,585,851                    860,559      100,024,996      (Rs.100=Kr.79.80                       Rs.10,78,395" In  computing the profits of the assessee in India  in  each year the Income-tax Officer allowed normal depreciation  and other  trade allowances admissible under the Indian  Income-

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tax Act, 1922, and the relevant rules made thereunder.   He, however,  did not allow initial depreciation and  additional depreciation in respect of the ships of the assessee in  any of  the assessment years, because the ships acquired by  the assessee were not introduced into the Indian business in the years  in  which they were newly acquired.  ’The  orders  of ’assessment  were  confirmed  by  the  Appellate   Assistant Commissioner. 3 In appeal to the Income-tax Appellate Tribunal the  assessee claimed Additional depreciation for four ships for which the following details were furnished: "(1) S. S. Bintang    Brought into use in 1950.Brought into                          use in the Indian trade in 1951.                       Claim for the assessment years 1952-53                       to 19-54-55. (2) S. S. Billiton    Brought into use in 1951. Brought into                       use in the Indian trade in 1952. Claim                       for the Assessment years 1953-54 to                       1956-57. (3) S, S. Banka     Brought into use in 1953. Brought into                     use in the Indian trade in 1954.  Claim                     for the assessment years 1955-56 and                     1956-57. (4) S. S. Bawean    Brought into use in 1953. Brought into                      use in the Indian trade in 1954.  Claim                      for the assessment years 1955-56 and                      1956-57." The  assessee  and  the Commissioner were  agreed  that  the taxable  income of the assessee had to be determined by  the application  of the second method in Rule 33 of  the  Indian Income-tax Rules, 1922.  The Tribunal also observed that the Commissioner  and  the  assessee  agreed  that  the  formula adopted by the Income-tax Officer was "the correct method of assessment". The  Commissioner submitted before the Tribunal that if  the Indian  business of the assessee be regarded as part of  its world business and not independent of it, the world  profits of the assessee must be computed according to the provisions of   the  Indian  Income-tax  Act,  1922,   and   additional depreciation  may be taken into account in  determining  the taxable  profits  under  the  Indian  Income-tax  Act  as  a fraction  of the world profits.  But he maintained  that  if the Indian trade be regarded as a separate business and  not part  of the world trade of the assessee, additional  depre- ciation  could only be allowed under S. 10(2)(vi-a)  of  the Indian  Income-tax  Act, provided ships which  are  new  are introduced into the Indian trade and not otherwise, In the opinion of the Tribunal, in computing the taxable in- come of the assessee under the Indian Income-tax Act,  1922, the  Indian  business  must  be taken  to  be  part  of  the assessee’s  world  business,  and  "depreciation  which  the assessee  was entitled to, in respect of its world  business by  the  application of the Indian Income-tax Act  would  be proportionately   available   in  respect  of   its   Indian business."  The  Tribunal  observed that under  r.  33  "the profits have to be calculated under the terms of the  Indian Incometax Act and this act postulated that on all machinery, plants  and  such other things like  steamers  brought  into business after March 31, 1948, additional depreciation  must also be granted".  The 4 Tribunal  then  observed  that the ships  brought  into  the Indian  trade were not new in the years of account  relevant to the five years of assessment, but the assessee was  still

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qualified  under S. 10(2) (vi-a) to additional  depreciation for a continuous period of five years, and "the fact in  the first  of  these  years the new ships did not  call  at  the Indian  Ports in one assessment year did not disentitle  the assessee to the benefit not only for that year but also  for the  succeeding four years".  Accordingly the Tribunal  held that  in  respect  of all the four ships  of  the  assessee, additional depreciation was admissible as claimed. At the instance of the Commissioner of Income-tax, the  fol- lowing  question  was referred by the Tribunal to  the  High Court of Calcutta for opinion in respect of each of the five years : "Whether  on  the facts and circumstances of  the  case  the assessee-Company  is entitled to additional depreciation  in respect of the four ships mentioned above?" The High Court answered the question in the negative Clause (vi-a) was inserted in s. 10(2) of the Indian Income- tax  Act, 1922, by s. 11 of the Taxation Laws (Extension  to Merged States and Amendment) Act 67 of 1949.  The clause  as amended by s. 8 of the Indian Income-tax (Amendment) Act  25 of’ 1953 with effect from April 1, 1952, reads as follows :               "In respect of depreciation of buildings newly               erected,  or of machinery or plant  being  new               which  has been installed, after the 31st  day               of March, 1948, a further sum (which shall  be               deductible  in  determining the  written  down               value)  equal to the amount  admissible  under               clause (vi) (exclusive of the extra  allowance               for  double or multiple shift working  of  the               machinery    or   plant   and   the    initial               depreciation  allowance admissible under  that               clause  for the first year of erection of  the               building or the installation of the  machinery               or  plant)  in not more than  five  successive               assessments  for  the  financial  years   next               following  the  previous year  in  which  such               buildings  are erected and such machinery  and               plant installed and falling within the  period                             commencing  on the 1st day of April, 1 949,  and               ending on the 31st day of March, 1959." 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 5 under,  S.  10(2)(vi) and additional depreciation  under  S. 10(2)(vi-a) are undoubtedly admissible in the conditions and to the extent allowed under the two clauses. By S. 4(1) of the Indian Income-tax Act, the total income of any  previous  year of a non-resident includes  all  income, profits and gains from whatever source derived which- (1)  are  received or are deemed to be received in the  tax- able  territories  in  such year by or  on  behalf  of  such person, and (2)  which accrue or arise or are deemed to accrue or  arise to him ’in the taxable territories during such year. Section  10 of the Act which charges to tax the profits  and gains  of business, profession or vocation carried on by  an assessee  applies to assessees who are residents,  residents but not ordinarily resident, and non-residents.  Profits and gains of business of a non-resident received or deemed to be

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received  in the taxable territories by or on behalf of  the assessee are taxable under the Indian Income Tax Act 1922  : profits  and-gains of business which accrue or arise or  are deemed to accrue or arise to him in the taxable  territories are also taxable under that Act; but profits and gains which accrue  or arise or are deemed to accrue or arise to a  non- resident  without  the taxable territories are  not  taxable under the Act. Section  4 is one of the pivotal sections in the  scheme  of the  Income-tax Act.  Thereby within the total income  of  a non-resident   is  included  income  received,  arising   or accruing,  or  deemed to be received, or to have  arisen  or accrued,  -within the taxable territories.  The Act  however gives  no clear guidance for determining when income may  be said   to  have  arisen  or  accrued  within   the   taxable territories.   But  r. 33 framed under the Act  purports  to give   some   direction  to  the  Income-tax   Officer   for determining income, profits or gains accruing or arising  to a non-resident for the purpose of assessment to  income-tax. There is no dispute that the profits of the business taxable under the Indian Income-tax Act, 1922, are a fraction of the world-profits-and the profits are to be determined under  r. 33 of the Income-tax Rules.  Rule 33 of the Income-tax Rules reads as follows :               "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 asset or, source of income in the taxable territories, or through or from any               6               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 with  the               provisions  of the Indian Income-tax  Act)  as               the  receipts so accruing or arising  bear  to               the total receipts of the business, or in such               other  manner as the  Income-tax  Officer  may               deem suitable." The  rule authorises the Income-tax Officer to adopt one  of the three methods of determining income, profits or  gains’- ?Or  the  purpose  of assessment  to  income-tax  where  the Income-tax Officer is unable to ascertain the actual  amount of  income,  profits or gains, arising inter-alia out  of  a business  connection  in  the taxable  territories  :-(a)  a percentage   of   turnover  considered  reasonable   (b)   a proportion  of the total profits (computed according to  the provisions of the Indian Income Tax Act) of the business  of the  assessee  equal to the proportion  which  the  receipts accruing  or  arising  bear to the  total  receipts  of  the business and (c) such other manner as the Income-tax Officer may deem suitable. 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,

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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. Apparently  the Income-tax Officer did not apply the  second method  under r. 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. 7 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  r.  33, and claimed on that footing that  beside  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  r.  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. There  was apparently no clear appreciation of the true  im- port   of  the  second  method  under  r.  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  clients  may not be able to bring before the Income-tax Officer the books of account of their world trade. The Income-tax Officer has evolved a special formula for de- termining  the profits which is not the second method in  r. 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. Clearly the Income-tax Officer did not in computing the tax- able  income  resort to the second method in r.  33  of  the

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Incometax  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 8 by  the  Income-tax officer.  Additional depreciation  is  a statutory  allowance in the determination of taxable  profit under  S. 10 of the Act, and in the case of  a  non-resident where actual income cannot be determined, and resort is  had to  r.  33,  not when an empirical  method  is  adopted  for computation of the tax-able income. 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. It was common ground that the appropriate method for  deter- mining the profits was the second method in r. 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 r. 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. The appeals fail.  The assessee will pay the costs of  these appeals.  One hearing fee. R.K.P.S.                                             Appeals dismissed. 9