Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: COMMISSIONER OF INCOME-TAX, WEST BENGALI VS Respondent: ELLERMAN LINES LTD.Honorable Justice P. B. MUKHARIIDr. D. Pal,B. L. Pal
1973 P T D 130
1973 P T D 130
[Calcutta (India)]
Before P. B. Mukharji and K. L. Roy, JJ
COMMISSIONER OF INCOME‑TAX, WEST BENGALI
Versus
ELLERMAN LINES LTD.
Income‑tax Reference No. 163 of 1964, decided on 11th April 1968.
Income‑tax‑-Foreign shipping company‑Taxation of Indian income‑Procedure‑C. B. R. Circulars and Income‑tax Rules, 1922, r. 33‑‑Scope and interpretation‑ Destination earnings received in India‑C. B. R. letters to correspondents, legal value of Letter to Turner Morrison c& Co.‑Interpretation and validity‑‑Wear and tear allowance and investment allowance of U. ‑ K.- Whether to be deducted while accepting ratio certificate of U. K. authorities in assessing the Indian income ‑ Indian Income‑tax Rules, 1922, r. 33.
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 Indian Income‑tax Rules, 1922.
To accept the ratio certificate of the U. K. taxing authorities only when the rate of investment allowance is below or up to the rate of the development rebate of India and not to do so when it is above is not a correct method of interpreting the statu tory or legal position in this respect.
It is not within the jurisdiction of the taxing authorities or Courts of India to decide that the investment allowance of U. K. corresponds to development rebate allowed by the Indian law. ‑
The letter of August 26, 1957, from the secretary, Central Board of Revenue to Turner Morrison & Co. Ltd. is not "order, instruction" and direction of the Central Board of Revenue within section 5(8) of the Income‑tax Act. Even if it were so, the view taken there is against both the Act and circular of the Central Board of Revenue in so far as it assumed jurisdiction to determine what is an investment allowance under the U. K. Act and whether investment allowance as construed by the U. K. authorities corresponds to the development rebate under the Indian Income‑tax Act :
Held, that the Tribunal was wrong in allowing the claim of the assessee for the investment allowance under the U. K. Act in computing the total world income for the purpose of determining the assessee's Indian ,income under rule 33, of the Income‑tax Rules, 1922.
Roy, J.‑Though the allowance for development rebate was introduced in India from the assessment year 1955‑56 and the .corresponding investment allowance in U. K. even earner, in 1954, no corresponding modification in the instructions was issued by the Central Board of Revenue for guidance of the income‑tax Officers. It must therefore be held that the Central Board of Revenue intended that no allowance other than the U. K. wear and tear allowance should be considered and allowed in determining the ratio of profit to‑total turnover for the purpose of applying the same to the Indian turnover.
If instead of giving the ratio of the investment allowance separately, the ratio certificate only mentioned the ratio of profit to the gross earnings after deducting the investment allowance and also gave the ratio of the wear and tear allowance in the U. K., the Income‑tax Officer would‑be bound under the aforesaid instructions to accept the aforesaid ratios. He could not dissect the certificate and add back the amount of the investment allowance. As the certificate in the present case has shown the ratio of profit and the ratio of the wear and tear allowance and that of the investment allowance separately, the departmental, instructions did not authorise the Income‑tax Officer to determine the ratio of 'profits afresh after giving a further deduction on account the investment allowance in the U. K.
Commissioner of Income‑tax v. Netherlands Steam Navigation Co. Ltd. (1965) 57 I T R 774 and Kumar Jagadish Chandra Sinha v. Commissioner of Income‑tax (1955) 28 I T R.732 ref.
B. L. Pal with B. Gupta for the Commissioner.
Dr. D. Pal for the Assessee.
JUDGMENT
P. B. MUKHARII, J.‑This is a reference under section 66(1) of the Indian Income‑tax Act, 1922. The two questions of law which have been referred to this Court for an answer are as follows:
"(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 ?
(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 development rebate under the Indian Income. tax Act, 1922) in the computation 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 facts giving rise to these questions of law may now be briefly stated. The assessment years 1960‑61 and 1961‑62 are the relevant years. The previous relevant years are the calendar years 1959 and 1960. The assessee is a non‑resident British shipping company whose vessels ply on the waters all over the world including Indian waters.
The Income‑tax Officer determined the assessee's Indian profits at a percentage of its total earnings on the basis of rule 33 of the Income‑tax Rules. Of the three alternative methods laid down by, rule 33. for estimating the assessee's Indian profits, the statement of the case makes it quite clear that' the Income‑tax Officer adoped the second of the three methods. In other words, he computed the assessee's 'Indian profits at an amount' which bore the same' proportion to the total profits of the business (computed In accordance with the Central Board of Revenue Circular No. 7 of 1941 dated 10th February 1948) as the receipts accruing or arising in the taxable territories bore to the total receipts of the business.
Before the Income‑tax Officer the assessee's contention was that even while its profits were being computed in accordance with rule 33 of the Income‑tax Rules, in doing so the instructions issued by the Central Board of Revenue were to be adhered to. As the assessee was electing to be assesseed on the basis of the ratio certificate granted by the U. K. authorities, a course permitted to him under the circular of the Central Board of Revenue in respect of its profits as well as for wear and tear, the assessee's total profits had to be worked out according to the said ratio without making any adjustment in it. In other words, the extreme contention of the assessee before the Income‑tax Officer was that the U. K. ratio certificate must be taken as it is. The Income‑tax Officer made his own computa tion and in doing so be did not include the destination earnings in the Indian ports for the purpose of applying the ratio. This gave rise to the first question before this Court:
There was an appeal by the assessee and the Appellate Assistant Commissioner on appeal observed that the assessee shipped cargo on the "freight payable at destination" basis. Thus the freight in respect of the cargo loaded at non‑Indian ports was collected by the assessee on arrival of the vessel at Indian ports. Such freight was definitely earned in India and the Appellate Assistant Commissioner found it difficult to understand why such earnings should not have been included in computing the assessee's income on the basis of the ratio certificate. The Appellate Assistant Commissioner, therefore, accordingly directed the Income‑tax Officer to include the destination earnings while determining the assessee's profits for the years in question.
The Department, being aggrieved by the order of the Appellate Assistant Commissioner, preferred an appeal to the Tribunal. The Tribunal came to the conclusion that the freights collected in Indian ports by the assessee, even if they related to cargo loaded outside India, were earned and received in India and there was no reason why they should be excluded from the Indian earnings before applying the ratio as given by the U. K. s certificate. The Tribunal accordingly confirmed the order passed by the Appellate Assistant Commissioner.
The other question relates to the allowance of development rebate which the Appellate Assistant Commissioner had ordered to be given. It was argued on behalf of the Department before the Tribunal that, since the conditions required for allowance of development rebate were different from the Investment allowance in U. K., the U. K. ratio certificate in so far as grant of investment allowance was concerned could not be applied unless the conditions laid down under the Indian Income‑tax Act were satisfied. It was also argued that notwithstanding the allowance for wear and, tear provided for in, the U. K. ratio certificate which the assessee could adopt; such allowance could. not be granted .under the Indian Income‑tax Act unless the assessee had created a reserve of 75 per cent. of the claim Thirdly, it was contended for the Department that the wear and tear allowance mentioned in the instructions of the Central Board of. Revenue corresponded. only to the depreciation allowance under the Indian Income tax Act which was an allowance only under section 10(2)(vi) of the Act arid did not include an ,allowance by way of development rebate.
The decision of the Tribunal indicates that the Income‑tax Officer was bound ,under section 5 of the Income‑tax Act to follow the instructions of the Central Board of Revenue. These instructions of the Central Board of Revenue clearly laid down that investment allowance was permitted as a deduction in respect of the development rebate allowable' under the Indian Income‑tax Act. As for the two years under question the rate of development rebate was the same as the rate of investment allowance in U. K., the Tribunal 'field that the Appellate Assistant Commissioner was justified in allowing the develop ment rebate to the assessee on the basis of U. K. ratio certificate for the two years under appeal. It is, under these circumstances, that the two questions of law, quoted above have been referred to this Court for decision.
At the outset it might be pointed out that there is no case on rule 33 on the particular point which Is raised before this Court. Reference was made to the decision in Commissioner of Income‑tax v. Netherlands Steam Navigation Co. Ltd. ((1965) 57 I T R 774). That case, however, in our opinion, does not apply in tile present reference before us. In the first place, that was ,a case dealing no doubt with rule 33 but in its impact with section 10(2)(via) and not with (b) with which we are concerned: It was a case of initial depreciation and not an investment allowance. Secondly, this was not. a case of British shipping company which is situated differently under rule 33 and the circular of the Central Board of Revenue read together, but was a case of a Dutch company.
That case, however, makes one point quite clear and that is that section 10(2)(via) confers a relief on the assessee and should therefore be strictly construed and the assessee must establish that his case falls within the terms of the clause.
I shall take up the first question first. This relates to destination earnings. The facts found are that such earning or freight is earned in India. These destination earnings are all collected in India and are part of Indian earnings.
Rule 33 of the Income‑tax Rules reads, inter alia, 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 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."
An analysis of rule 33 will show the three methods to estimate the Indian profits. These three alternative methods are : (a) on such ,percentage of the total turnover as the Income. tax Officer may consider reasonable; or (b) at an amount which bears the same proportion to the total profits of the business (computed according to the Indian Income‑tax Act) as the receipts accruing or arising in the taxable territories beat to the total receipts of the business ; or (c) in such other manner as the Income‑tax Officer may deem suitable.
The Income‑tax Officer adopted the second method. In other words, the method adopted in this case was an estimate at an amount which bears the same proportion to the total profits of the business (computed according to the Indian Income‑tax Act) as the receipts accruing or arising in the taxable territories bear to the total receipts of the business.
The crucial' part of the second method of the estimate is that the profits of the business have to be computed according to the Indian Income‑tax Act. It is thereafter` that the proportion has to be worked out at a figure or amount which bears the same proportion to such total profits so estimated as the receipts arising or accruing in the taxable territories, bear to the total receipts of the business. The receipts have been found as a fact in this case in respect of the destination earnings to be arising or accruing in the taxable territory of India.
On the plain language of rule 33, 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.
The next part of the argument on this point is a considera tion whether the circular of the Central Board of Revenue, being Circular No. 7 of 1942 dated February 10, 1942, makes any difference on this point. The circular reads as follows:
CENTRAL BOARD OF REVENUE
C. B. R. Cir. No. 7 of 1942. C. No. 27 (17)‑I.T./41, dated 10‑2‑42.
Sub : Assessments‑British another foreign shipping companies.
The Board has decided that the instructions which appeared in paragraphs 112 and 113 of the Income‑tax Manual (7th Edition) and which have been substantially reproduced at pages 348‑350 (excepting the last two paragraphs at cage 350) of the Income‑tax Manual (8th Edition) should .be followed in respect of the assessments of foreign shipping companies from 1940‑41 onwards. These instructions, inter alia, allow a foreign shipping company furnishing annual accounts for the whole of its business, Indian and foreign to adopt the U. K. wear and tear allowance for the purpose of the computation of its income in accordance with the second method provided by rule 33, and also allow a British shipping company 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.
(2) The bearing of the provisions of sections 10(2) (vii) and 24(2), however, requires to be considered in this connection. As no record of any depreciation allowance has been kept in. India in respect of the companies assessed in accordance with either of the methods noted above, it will not be possible to work out the written down value without which the provisions of sections 10(2)(vii) cannot be applied. If therefore any foreign shipping company desires to follow the method of electing the U. K. wear and tear allowance for the. purpose of its Indian assessment, it must agree either to forgo the allowance under section 10(2)(vii)‑the Govern ment also agreeing; in such a case, to forgo the tax on the 'excess' described in the second proviso to section 10(2)(vii) or to give particulars (agreed with the U. K. authorities) in respect ,of (f) the original cost of the asset sold or‑discarded, (ii) the aggregate U K. wear and tear allowance in respect of that asset, and (iii) its scrap value or sale price. The 'excess' or the loss computed oil the basis of these particulars will in that case, be add to or deducted from the whole world income computed the purpose of the second method in rule 33. As regards companies electing to be assessed on the basis of the U. K. ratio certificates it will not be possible to apply the provisions of section 10(2)(vii) to such cases and the companies concerned will have to accept this position.
(3) As regards section 24(2), there will be no difficulty in respect of companies electing the U. K. wear and tear allowance only. It will, however, not be possible to work out correctly the loss to be carried forward in respect of the companies electing to be assessed on the basis of the U. K. ratio certificate unless, the certificate in respect of the assess ments from 1939‑40 onwards contains the following particulars in place of the particulars furnished for assessments up to and including the year 1938‑39 :‑
(i) the ratio of profits (before` deduction of any previous loss) of any accounting period as computed for the purposes of the U. K. income‑tax, computed without making any allowance for wear and tear, to the gross earnings of the company's whole fleet ;
(ii) the ratio of loss (before including any previous loss) of any accounting period computed as above ;
(iii) the ratio of United Kingdom allowance for wear and tear to the gross, earnings of the whole fleet.
(4) Thus either certificates (i) and (iii) or certificates (ii) and (iii) will apply to a particular case. The relative ratios being applied to the Indian `gross earnings', it will be possible to work out separately the, proportionate Indian profit or loss and depreciation and there will be no difficulty in carrying forward the loss or the depreciation or both, as the v case may be."
It is clear from the language of this circular that it does not in terms at all include destination earnings and therefore this circular, by any process of interpretation, cannot exclude m the destination earnings. The ratio certificate given in this case by the U. K. authorities is naturally therefore silent on the point of destination earnings.
I, therefore, have no hesitation to come to the conclusion on the, above grounds and reasons that 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 Indian Income tax Rules. I, therefore; answer the first question in the affirmative.
The next point relates to the investment allowance. The ratio certificate given by the Chief Inspector of Taxes, U. K., states thus :
"An investment allowance In respect of capital expenditure incurred in the same year on the provision of new machinery or plant has also been made. This allowance bears a ratio to the gross shipping earnings of 5,085%.
A balancing charge in respect of the sale of machinery or plant in the same year has also been made. This charge bears a ratio to the gross shipping earnings of 0.177 %.
In arriving at the profit mentioned in the first paragraph of this letter, no account has been taken of the above wear and tear and investment allowance, or of any trading losses, wear and tear, investment, initial and balancing allowances brought forward from previous years."
The ratio certificate indicates also that "the allowance for wear and tear of plant for the same year bears a ratio to the gross shipping earnings of 14 197 per cent.".
Now, rule 33 of the Indian Income‑tax Rules quoted above naturally does not speak of any "investment allowance" as such. At the time when this rule was framed, there was no investment allowance as such known under the Income‑tax Act either in India or in the U. K. Therefore, it could not have been in the contemplation of the circular of the Board of Revenue, Circular No. 7 of 1942, that such "investment allowance" should be affected by such a circular. The "invest ment allowance" as such came into the U. K. tax in 1954 but this Central Board of Revenue circular of India, being Circular No. 7 of 1942, continued unchanged.
What has been contended on behalf of the assessee is that the "development rebate" under the Indian Income‑tax Act corresponds to the "Investment allowance" under the U. K. Act. Now, "development rebate" was introduced in the Indian Act on April 1, 1955, by section 8 of the Finance Act; 1955, by amending section 10 of the Income‑tax , Act and enlarging it.
Further amendment on this point of development rebate was introduced, in the Indian Act on . April 1, 1958, by the Finance Act of 1958: Now that the development rebate is a matter Of the Indian, statute, it can only be allowed on the terms or the Indian Act and not on any ratio certificate granted under the U. K. Act or under the circular of the Central Board of Revenue. Such a course will 'lead to conflict between the Indian statute and the ratio certificate granted by the U. K. tax authorities and the Central Board of Revenue Circular No. 7 of 1942 which was not and could not be dealing with the question of development rebate at all.
The Tribunal realised this difficulty and therefore adopted the course which meant reliance on a letter from the Secretary, Central Board of Revenue, to Messrs Turner Morrison & Co. Ltd. This letter was quoted in another order of the Tribunal in I. T. Ref, No. 2406 of 1961‑62. The letter is quoted at length in the' Tribunal's order, and is relevant for the present purpose. The crucial part of this letter dated August 26, 1957, is as follows :
"I am directed to refer to your latter dated February 8, 1957, on the above subject (assessment of British shipping companies on the basis of ratio certificates‑Treatment of investment allowance granted in the U. K.) and to state that as the development rebate which corresponds to the investment allowance granted in the U. K. is allowed under the Indian Income‑tax Act from the assessment year 1956‑57, there is no objection to allow the investment allowance for the purpose of the computation of the Indian income of British shipping companies. This would, however, be subject to the condition that 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 the development rebate allowed under the Indian Income‑tax Act."
The Tribunal's reasons are that the Income‑tax Officer was bound under section 5 of the Indian Income‑tax Act to follow these instructions of the Central Board of Revenue because this particular letter, of August 26, 1957, clearly shows that the Investment allowance is permitted as a deduction in respect of the development rebate allowable under the Indian Income‑tax Act.
I have carefully considered this reasoning and the nature and character of this letter. I am unable to accept the conclusion to which the Tribunal arrived on this point of "investment allowance" and on the character and nature of this letter. I shall state my reasons very briefly.
I am of opinion that sitting here on a reference under the Indian Income‑tax Act, it is not permissible for this Court to interpret and construe the U. K. Act, to construe and interpret U. K. revenue laws, and come to a finding that what in the U. K. is called an investment allowance under the U. K. Act is the same as development rebate under the Indian income‑tax Act. That will be exceeding our jurisdiction. It may also lead to a conflict of decisions between the Courts in the U. K. and the Courts in India, on the proper interpretation and scope of the U. K. Act and what are the implications of investment allowance granted by the U. K. Act. Jurisdiction to decide .the nature and character of investment allowance under the U. K. Act must therefore have to belong to the U. K. Courts. the assumption of jurisdiction therefore by way of interpretation and construction which 'the Tribunal did on the basis of the letter of the Centr6l Board of Revenue dated August 26, 1957, appears to me a course which cannot be adopted in India. I, there fore, cannot hold that the U. K. investment allowance is the same as or 'corresponds to, the development rebate under the Indian Income‑tax Act. That really knocks the bottom out of the very foundation of the finding of the Tribunal on the basis of which investment allowance…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.