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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Sabyasachi Mukharji
  • Suhas Chandra Sen, JJ.
Acts
  • section 32(1)(iii) of the Income-tax Act, 1961,
  • ss. 32, 34(3) and 43 of the I.T Act of 1961.
  • section 41(2) of the Income-tax Act, 1961,
  • rule 10(ii) of the Income-tax Rules, 1962,
  • ss. 32, 34(3) and 43 of the I.T Act, 1961,
  • rule 5 of the Income-tax Rules, 1962,
  • rule 10(ii) of the I.T Rules, 1962,
  • s. 256(1) of the I.T Act, 1961,
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Sabyasachi Mukharji
  • Suhas Chandra Sen, JJ.
Acts
  • section 32(1)(iii) of the Income-tax Act, 1961,
  • ss. 32, 34(3) and 43 of the I.T Act of 1961.
  • section 41(2) of the Income-tax Act, 1961,
  • rule 10(ii) of the Income-tax Rules, 1962,
  • ss. 32, 34(3) and 43 of the I.T Act, 1961,
  • rule 5 of the Income-tax Rules, 1962,
  • rule 10(ii) of the I.T Rules, 1962,
  • s. 256(1) of the I.T Act, 1961,
See more information ...
Smart Summary

Structured Summary of the Opinion (Suhas Chandra Sen, J.)

Factual and Procedural Background

This reference under s. 256(1) of the Income-tax Act, 1961, concerned three questions referred by the Tribunal relating to the assessments of a Danish non-resident shipping company for the assessment years 1962-63 and 1963-64 (relevant previous years: calendar years 1961 and 1962). The company was assessed in India under rule 10(ii) of the Income-tax Rules, 1962, whereby its Indian taxable income was determined in the same proportion as Indian receipts bore to total shipping receipts.

The ITO determined the shipping business results at worldwide losses (Kr. 7,213,432 for 1962-63 and Kr. 12,696,025 for 1963-64) but disputed the assessee's claim to depreciation. The ITO applied the 20-year limitation (derived from s. 32(1)(i) read with Appendix I under rule 5) to deny depreciation for vessels that had been part of the fleet for over 20 years and, consequently, disallowed certain depreciation claims and treated certain sale proceeds as taxable profits (under s. 41(2)). The ITO also disallowed some claimed losses on the ground that the deficiency had not been actually written off in the assessee's books.

The assessee's appeals to the AAC were dismissed; the assessee then appealed to the Tribunal which allowed the assessee's contentions (relying on earlier Tribunal decisions and the assessee's prior case), allowed depreciation as claimed, deleted certain additions, and permitted losses under s. 32(1)(iii). The matter was referred to this Court on the three questions stated by the Tribunal.

Legal Issues Presented

  1. Whether the Tribunal was right in holding that the assessee was entitled to get depreciation allowance under rule 5 of the Income-tax Rules, 1962, even in respect of ships which had formed part of the assessee's fleet for more than 20 years.
  2. Whether the Tribunal was right in holding that no profit chargeable to tax within the meaning of section 41(2) of the Income-tax Act, 1961, in respect of any of the ships sold by the assessee could be included in the computation of total profits and gains under rule 10(ii).
  3. Whether, in computing total profits and gains under rule 10(ii), the assessee was entitled to deduction of a loss under section 32(1)(iii) of the Income-tax Act, 1961, in respect of ships sold by the assessee.

Arguments of the Parties

Assessee's Arguments

  • The assessee contended it was entitled to depreciation for the full 20 years under the Indian tax statutes irrespective of when the ships were originally acquired; it was irrelevant when a vessel was actually acquired outside India so long as Indian depreciation had not been actually allowed earlier.
  • Reliance was placed on prior decisions (including a Tribunal decision in CIT v. Wilh Wilhelmsen Lines Ltd. and the assessee's own earlier assessment-year decision) which, the assessee said, settled the question in its favour.
  • With respect to sales, the assessee argued that if written down values were computed by reference to depreciation actually allowed under Indian law, there would be no taxable profit on sales and, therefore, no charge under s. 41(2).
  • On the proviso to s. 32(1)(iii) (requirement that deficiency be actually written off in the books), the assessee argued it could not write off more than the amount at which the vessel already appeared in its balance-sheet and that many vessels already appeared at low values (e.g., Kr. 100), indicating that the deficiencies had effectively been written off earlier.

Revenue's Arguments

  • The Revenue argued the earlier case relied on by the assessee (decided by a Bench of this Court) was distinguishable on facts — in that case there was a clear finding that the ships had not touched Indian ports during the war years (April 1940 to December 1945) and had not been allowed depreciation in India for that period; therefore, that case should not be treated as conclusively applying to the present facts.
  • The Revenue maintained that depreciation should be computed from the date of acquisition of the asset and the 20-year cap applied irrespective of whether Indian depreciation had been allowed in earlier years.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner of Income-Tax v. Wilh Wilhelmsen Lines Ltd. (ITA No.11628 of 1960-61) / [1978] 115 ITR 10 (Cal.) The Tribunal had relied on this earlier decision in support of allowing depreciation for the full 20-year span; it was a cited authority for the assessee before the Tribunal. The Court observed that this case and the assessee's earlier case had been disposed of by the Court on reference; it recognized that the Tribunal relied on it but examined subsequent authorities and the statutory provisions to resolve the present questions.
CIT v. Swedish East Asia Co. Ltd., [1981] 127 ITR 148 (Cal.) Where no depreciation had been "actually allowed" in India for certain years (here, war years), there was no question of double depreciation; interpreted ss. 32, 34(3) and 43 to permit depreciation claims for ships on a 20-year basis where depreciation had not been actually allowed earlier. The Court relied on this decision as directly supporting the Tribunal's conclusion that the assessee was entitled to claim depreciation in respect of ships which had been on the fleet for more than 20 years when no depreciation had been actually allowed earlier in India.
Income-tax Reference No. 430 of 1974 (judgment delivered April 28, 1980) Reiteration of the principle that where depreciation had not been actually allowed in India, the span of depreciation should be calculated so as not to produce a double allowance; supports the approach taken in Swedish East Asia. The Court noted that the principle was reiterated in this reference and treated it as reinforcing the Tribunal's approach; it formed part of the basis for answering the reference questions in favour of the assessee.

Court's Reasoning and Analysis

The Court examined the legal and factual matrix as presented to it and the authorities cited. Its analysis proceeded along the following lines:

  1. Statutory framework and dispute: The central statutory provisions in issue included s. 32 (various sub-sections), s. 34(3), s. 41(2) and s. 43(6) of the Income-tax Act, 1961, and relevant rules (rule 5 and rule 10(ii) of the Income-tax Rules, 1962). The factual dispute concerned whether depreciation and written down values should be computed by reference to the date of acquisition (thereby invoking a 20-year cap measured from acquisition) or by reference to the depreciation actually allowed to the assessee under Indian law (which could mean that where no Indian depreciation had been actually allowed in certain earlier years, the assessee should not be denied the domestic allowance).
  2. Interpretation of "written down value": The Tribunal took the view that the expression "written down value" in s. 43(6) meant, for assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the various Indian I.T. Acts. The Court accepted this construction as the correct legal interpretation, which meant the ITO could not deduct "depreciation allowable" beyond what had actually been allowed in computing written down value.
  3. Reliance upon earlier decisions: The Court considered prior authorities, notably CIT v. Swedish East Asia Co. Ltd. (and the Court's reiteration in Income-tax Reference No. 430 of 1974). Swedish East Asia held that where the assessee had not had any depreciation "actually allowed" in India for certain years (war years), there was no question of the assessee enjoying double depreciation — once for world income and again for Indian income — and that ss. 32, 34(3) and 43 supported allowing depreciation in respect of ships that had been on the fleet for more than 20 years. The present Court found that the factual distinction urged by the Revenue (that the earlier case turned on ships not touching Indian ports during war years) was not a valid basis to distinguish the principle: the decisive factor was whether depreciation had been "actually allowed" in India in earlier years.
  4. Application to the present facts: On the facts before it (including the assessee's contention that its first year of assessment in India was 1950-51 and that depreciation had not been actually allowed in earlier years), the Court agreed with the Tribunal's view and the reasoning in Swedish East Asia. The Court therefore held that the assessee was entitled to depreciation for the full 20-year period despite the ships having been acquired more than 20 years earlier, because the computation of written down value must reflect depreciation actually allowed under Indian law.
  5. Consequence for sale transactions and s. 32(1)(iii): Because of the above approach to written down values, the Court agreed with the Tribunal that, when the correct written down values were used, the sales would produce losses rather than taxable profits; hence the ITO's charge under s. 41(2) could not be sustained. On the proviso to s. 32(1)(iii), the Tribunal (and the Court) interpreted the proviso as not requiring the deficiency to have been written off in the same year when the allowance was claimed — it is sufficient that the deficiency has actually been written off in the books at some time (and the factual pattern showed that balance-sheet valuations and prior write-offs satisfied that requirement).
  6. Costs and incidental directions: The Court directed that the ITO should work out the precise deduction for the assessment year 1963-64 (a figure was available and directed to be worked out), and the Court ordered that parties pay and bear their own costs.

Holding and Implications

Core Holding: All three reference questions were answered in the affirmative in favour of the assessee.

Direct implications and practical consequences (as stated in the opinion):

  • The Court affirmed the Tribunal's conclusion that the assessee was entitled to depreciation under rule 5 / s. 32 for the full 20-year period in computing written down values, even though the ships had been part of the fleet for more than 20 years, because written down value is to be computed by deducting depreciation actually allowed under Indian law.
  • As a corollary, no profit under s. 41(2) could be charged on the sale of ships where correct written down values (based on depreciation actually allowed) produced losses; the Tribunal's deletions of additions (Kr. 2,811,653 in 1962-63 and Kr. 4,236,752 in 1963-64) were consistent with this approach and endorsed in principle by the Court.
  • The assessee was entitled to claim losses under s. 32(1)(iii) where ships were sold at prices less than the written down value; the proviso to s. 32(1)(iii) does not mandate that the deficiency be written off in the same year in which the allowance is claimed.
  • The ITO was directed to work out and allow the precise deductible figure for the assessment year 1963-64 as indicated by the Tribunal; the Tribunal's allowance of Kr. 822,719 for 1962-63 was accepted (and similar computation to be done for 1963-64 as directed).
  • Costs: the parties will pay and bear their own costs.

Note: The Court's decision was grounded on the statutory construction of ss. 32, 34(3) and 43 and prior decisions (notably CIT v. Swedish East Asia Co. Ltd. and the Court's earlier reiteration in Income-tax Reference No. 430 of 1974). The opinion does not state that it establishes a novel principle beyond applying those statutory provisions and precedent to the facts before it.

Show full summary ...

    Commissioner Of Income-Tax v. East Asiatic Co. Ltd.

    The Judgment of the Court was delivered by

    Suhas Chandra Sen, J.:— The Tribunal has referred under s. 256(1) of the I.T Act, 1961, the following three questions to this court:

    “(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 5 of the Income-tax Rules, 1962, even in respect of ships which had formed part of the assessee's fleet for more than 20; years?

    (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no profit chargeable to tax within the meaning of section 41(2) of the Income-tax Act, 1961, in respect of any of the ships sold by the assessee could be included in the computation of the total profits and gains of the assessee's business under rule 10(ii) of the Income-tax Rules, 1962 ?

    (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in the computation of the total profits and gains of the assessee's business under rule 10(ii) of the Income-tax Rules, 1962, the assessee was entitled to deduction of a loss under section 32(1)(iii) of the Income-tax Act, 1961, in respect of the ships sold by the assessee?”

    2. This reference relates to the assessment years 1962-63 and 1963-64 for which the relevant previous years were calendar years 1961 and 1962. The assessee, a Danish company, was assessed in India as a non-resident in each of the above two assessment years. There was no dispute before the Tribunal that the assessments were completed under rule 10(ii) of the I.T Rules, 1962, namely, its assessable income in India was determined in the same proportion to its total profits and gains from shipping business as the receipts so accruing or arising in India bore to the total receipts of the business. According to this sub-rule, the ITO first determined the assessee's income from shipping business and then determined its income accruing or arising in India. In the assessment year 1962-63, the entire income from the shipping business was determined at a loss of Kr. 7,213,432 and in the assessment year 1963-64 at a loss of Kr. 12,696,025. According to the above sub-rule, such losses were to be determined in accordance with the provisions of the Act. There is also no dispute that the ITO did apply the Act, while determining the above losses, to various items. The dispute relates only to the application of the Act to the determination of the depreciation which was allowed to the assessee. The ITO, in this connection, worked out the written down value of its vessels by taking into consideration the fact that a particular vessel would not enjoy the allowance for more than 20 years, as according to s. 32(1)(i) of the Act read with Appx. I under r. 5 of the said Rules, it was entitled to depreciation of 5% on its actual cost. The claim of the assessee, on the other hand, was that it was entitled to depreciation for 20 years under the Indian I.T Acts, and it was irrelevant to find out when the vessel or ship was actually acquired. The ITO in the assessment year 1962-63 found that the assessee's four vessels whose original cost was Kr. 18,025,592 had been acquired more than 20 years before the assessment year under reference. According to him, therefore, they did not have any written down value and the assessee could not claim any depreciation. Rejecting the contention of the assessee, he disallowed, the claim of depreciation of Kr. 901,279 on the above amount. Similarly, in the assessment year 1963-64, he disallowed the depreciation of Kr. 460,550 on the original cost of two vessels which was stated to be Kr. 9,211,008. Besides the above, the ITO also found that the assessee had sold two vessels in the assessment year 1962-63 and four vessels in the assessment year 1963-64. Some of these vessels had also been acquired more than 20 years before the assessment years under reference. As already stated above, he was of the view that the written down values had to be worked out by deducting depreciation allowable in different years even though actually not allowed. On this basis, he brought to tax certain sums to profit, the details of which have been given in the orders of the ITO. The assessee had actually claimed certain losses as per its own working of the written down values which were disallowed by the ITO for two reasons, the first being same which was adopted for disallowing depreciation on the running vessels and the second being that the entire deficiency had not been written off in the assessee's books of account.

    3. The assessee appealed to the AAC against the aforesaid orders passed by the ITO but the AAC confirmed the orders of the ITO.

    4. The assessee appealed to the Tribunal. On behalf of the assessee strong reliance was placed in the case of CIT v. Wilh Wilhelmsen Lines Ltd. (ITA No. 11628 of 1960-61) relating to the assessment year 1958-59 and also in the assessee's own case in the earlier assessment year 1964-65. The assessee contended that the question raised in this appeal before the Tribunal was concluded by the decisions of the Tribunal in the aforesaid cases.

    5. The Tribunal, after a consideration of the submissions placed before it, was of the view that the assessee was entitled to depreciation for all the 20 years even if the vessels were purchased and brought into use earlier to that. According to the Tribunal, the expression “written down value” in s. 43(6) of the Act, meant, in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the various Indian I.T Acts. In the opinion of the Tribunal, therefore, the ITO would not be within his rights to deduct more than the above amount or the “depreciation allowable” to the assessee in working, out the written down value as he had done in the present case in the two years under reference.

    6. As regards the disallowance of claim under s. 32(1)(ii) of the Act as also taxing the entire sale proceeds as the profit of the assessee under s. 41(2), it was contended by the learned counsel for the assessee that if the written down value was worked out in accordance with the decisions referred to above, there would be no profit at all and the question of taxing any such amount would not arise. With regard to the additional reason given by the ITO, viz., that the deficiency had actually not been written off in the books of the assessee, he pointed out that the assessee could not write off more than the amount at which a particular vessel appeared in its balance-sheet. He submitted that the vessels “Lalandia”, and “Meonia” in the assessment year 1962-63 and vessels “India” and “Selandia” in the assessment year 1963-64 appeared at a cost of Kr. TOO each in the balance-sheet of the assessee which amounts had actually been written off. Similar was the case with other vessels. He pointed out that it was impossible for the assessee to write off any higher amount.

    7. The Tribunal accepted the above contention of the assessee. In its opinion if the written down values of the vessels sold out were Worked out in accordance with the principles laid down by the Tribunal in the two decisions cited above, as it had done, there would actually be losses on the sales and the question of assessing any profit would not arise. It, there fore, deleted Kr. 2,811,653 from the assessment year 1962-63 and Kr. 4,236,752 from the assessment year 1963-64.

    8. As regards the additional reason for the disallowance of losses claimed on the vessels sold out also, the Tribunal agreed with the contention of the assessee that it could not write off more than the amount at which the respective vessels appeared in its balance-sheet. The reason for such lower valuation, the Tribunal pointed out, obviously, was that the company had been writing off the depreciation at a higher rate or for a longer period which would also show that the deficiencies had actually been written off in earlier years which would also satisfy is not directly at least indirectly the condition laid down in the proviso to s. 32(1)(iii) that the deficiency should actually be written off in the books of account of the assessee. The Tribunal observed that the proviso did not lay down that such deficiency must be written off in the year in which the allowance was claimed. Looked at from either angle it appeared to the Tribunal that the assessee was entitled to claim a loss under s. 32(1)(iii) of the Act. It, accordingly, directed a further deduction of Kr. 822,719 for the assessment year 1962-63. The figure for the assessment year 1963-64 was not available on record. The Tribunal, therefore, directed the ITO to work it out and allow it from the total income of the assessee.

    9. The case of Commissioner Of Income-Tax v. Wilh Wilhelmsen Lines Ltd., [1978] 115 ITR 10 (Cal), and also the assessee's own case in the earlier assessment years, on which strong reliance was placed by the Tribunal, have now been disposed of by this court on reference. In the case of CIT v. Swedish East Asia Co. Ltd., [1981] 127 ITR 148 (Cal), it was held that in a case where the assessee had not suffered any taxation at all in India during the war years from April, 1940, to December, 1945, no depreciation had been “actually allowed” to it for those years and there was no question of the assessee enjoying double depreciation once in the computation of its world income and again in the computation of its Indian income in respect of the ships in question even though these ships might have been part of the world fleet of the assessee-company. It was held that in view of ss. 32, 34(3) and 43 of the I.T Act, 1961, the Tribunal was right in its conclusion that the assessee was entitled to claim depreciation in respect of ships which had been on its fleet for more than 20 years.

    10. This principle was reiterated in the case of the assessee for the earlier assessment year by this court in Income-tax Reference No. 430 of 1974, by a judgment delivered on April 28, 1980.

    11. It has been contended on behalf of the Revenue that the case of the assessee in the earlier assessment year which has been decided by a Bench of this court is not conclusive as it is distinguishable on facts. It has been contended that in that case there was a clear finding that the ships, which had been on the fleet of the assessee, a non-resident shipping company, had not touched Indian ports during the war years, that is, from April 1940, to December, 1945, and were not allowed any depreciation for that period. The AAC found as a fact that the assessee had not suffered any tax in India at all for the period from April, 1940, to December, 1945, but relying on the instructions issued by the Central Board of Revenue under the Act of 1922, he held that the assessee was not entitled to any depreciation, as the ships had been on its fleet for more than 20 years. The Tribunal, however, reversed the decision of the AAC in that case on a point of law. It has been argued that there is no finding similar to that in the case before us.

    12. We are unable to accept this contention. The assessee's case before the ITO was that the assessee's first year of assessment in India was 1950-51 and the assessee was entitled to depreciation for its vessels for 20 years. It was argued that if the depreciation was calculated on the basis of what was actually allowed under the Indian I.T Act and since no depreciation was allowed under the Indian I.T Act for the earlier years, there could not be any question of stretching the span of depreciation from such earlier years. The ITO, however, rejected this argument on the ground that depreciation was allowable from the time when the asset was acquired and it could not be postponed simply because Indian assessment (under the Indian I.T Act) took place in the subsequent years. The assessee company's case before the AAC was that the first year of assessment of the company in India was 1950-51 and 20 years for calculation of depreciation would run from 1950-51. The ships might have been acquired earlier but the ships did not come into the Indian waters and were not assessed in India and depreciation was not allowed on the ships in question at all before 1950-51. These facts were not in dispute before the AAC.

    13. In view of the aforesaid facts, the distinction sought to be made by the learned counsel on behalf of the Revenue is without any substance. The ratio of the decision in the case of CIT v. Swedish East Asia Co. Ltd., [1981] 127 ITR 148 (Cal), Was that in a case where no depreciation had been “actually allowed”, there was no question of the assessee enjoying double depreciation once in the computation of its world income and again in the computation of its Indian income. It was further held that the mere fact that the ships had been acquired earlier will not make any difference because of the clear wording of ss. 32, 34(3) and 43 of the I.T Act of 1961. We are of the view that the Tribunal was right in holding that the assessee was entitled to claim depreciation on the ships in spite of the fact that the ships were acquired more than 20 years ago. We are of the view that the first question must be answered in the affirmative and in favour of the assessee.

    14. The second question is really consequential to the first question as pointed out by the Tribunal and in view of the answer given to the first question, the second question must also be answered, in favour of the assessee and in the affirmative.

    15. So far as the third question is concerned, the Tribunal has pointed out that the wording of s. 32(1)(iii) is very clear. The Tribunal observed that the proviso had not laid down that the deficiency must be written off in the year in which the allowance was claimed. The Tribunal further observed that the assessee was entitled to claim the loss under s. 32(1)(iii) because the ships were sold at a price less than the written down value. The requirement of the proviso is that the deficiency must be actually written off in the books of the assessee. In our view, the Tribunal was right in holding that the proviso did not lay down that such deficiency must be written off in the year in which the allowance is claimed. In that view of the matter, the third question is also answered in the affirmative and in favour of the assessee. In the facts and circumstances of the case, the parties will pay and bear their own costs.

    Sabyasachi Mukharji, J.:— I agree.

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    Comments

    Commissioner Of Income-Tax v. East Asiatic Co. Ltd.
    (Jul 19, 1982)