Sabyasachi Mukharji, J. - (1.) IN this judgment, we propose to deal with these two references, because these relate to a common question relating to the same assessee for different assessment years. We shall, however, have to refer to a slight difference in the findings of the AAC in respect of one year, viz., the order passed by the AAC in INcome-tax Reference No. 670A of 1972, which would be relevant and to which we shall refer at the relevant time.
(2.) THE assessee is a non-resident shipping company registered in Sweden. So far as the first reference in concerned, the assessment year under consideration is 1963-64, the corresponding accounting year being the year ending December 31, 1962. THE ITO had not allowed depreciation on the two ships, viz., Bali and Mindore, which were acquired in the year 1941 on the ground that these two ships were acquired more than twenty years ago. THE ITO computed the total income at Rs. 1,63,572. It will be relevant for the present purpose to refer to certain portions of the order of the ITO. Dealing with the depreciation on these two vessels, the ITO observed, inter alia, as follows : "Deduct : Depreciation on vessels for reasons discussed in the assessment order for 1962-63, depreciation is not allowable on two vessels, viz., Bali and Mindore, which were acquired in 1941 and have, therefore, completed twenty years in the assessment year 1961-62. Depreciation is allowed as under : He, thereafter compueted the total income as under: With the other items, we are not concerned. There was an appeal before the AAC. Before the AAC, it was contended on behalf of the assessee that these two ships were purchased in 1941 and normally the depreciation should have been up to and including assessment year 1961-62 only, since the claim could be made only for 20 years. However, it was stated that during the war years, these two ships did not touch any Indian port between April, 1940, and December, 1945. Hence, it was urged that the depreciation on these ships should be allowed up to and including the assessment year 1966-67. On this question for the preceding year, the AAC noted that the contention of the assessee had been accepted. Therefore, he held that depreciation on the two ships in question was to be allowed for the year tinder appeal. The AAC, however, directed that the assessee should produce before the ITO evidence to show that no depreciation had been claimed or allowed during the war years on these two ships. He disposed of the contention before him in the manner indicated before. Thereafter, there was an appeal before the Tribunal. The Tribunal found that in I.T. Appeal No. 11628 of 1960-61 which was the appeal relating to the assessment year 1958-59, this point had been disposed of by the Tribunal in favour of the assessee. It is necessary to refer in detail to that order later because of the contention that was urged before us regarding the effect of the decision of the Calcutta High Court, which we shall refer to presently. Before we do so, in disposing of the instant appeal before the Tribunal, the Tribunal referred to a portion of the previous order as under : "In the case of a foreign shipping company like that of the appellant-company there may be ships which are borne more than 20 years on the total world fleet and many of the ships might not have been used at all in the Indian waters but there is no prohibition under the Indian Income-tax Act, against allowing depreciation on such ships simply on the ground that the ship had formed a part of the company's fleet for more than 20 years. We, therefore, hold in favour of the appellant-company, viz., that depreciation allowance as provided in Rule 8 should be allowed on all ships employed in connection with the company's Indian trade subject only to the limitation imposed under proviso (c) to Section 10(2)(vi). Accordingly, in our opinion, the assessee-company is entitled to depreciation allowance on the aforesaid two ships as prescribed in Appendix I in terms of Rule 5 of the Income-tax Rules, 1962, and subject only to the limitation prescribed by Section 34(2)(i) of the I.T. Act, 1961."
(3.) IN the premises, the Tribunal in Reference No. 506 of 1972 has referred the following question for our consideration : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to depreciation allowance under Rule 5 of the INcome-tax Rules, 1962, even in respect of the ships, Bali and Mindore, for the assessment year 1963-64 ?" T. Reference No. 670A of 1972 for the two assessment years, viz., 1964-65 and 1965-66, the questions referred are as under : Assessment year 1964-65: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to depreciation allowance under Rule 5 of the INcome-tax Rules, 1962, in respect of the ships, Bali, Mindore and Mangalore, for the assessment year 1964-65 : Assessment year 1965-66 : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to depreciation allowance under Rule 5 of the INcome-tax Rules, 1962, in respect of the ships, Bali, Mindore, Man-galore and Travancour, for the assessment year 1965-66?" Before we proceed further it may be appropriate to refer to the order of the Income-tax Appellate Tribunal in I.T.A. No. 11628 of 1960-61 for the assessment year 1958-59. There, after setting out the relevant facts, the Tribunal went on to observe that on behalf of the assessee it was urged before the Tribunal that the assessee-company, prior to 1936-37 assessment, had paid tax on the rough and ready basis provided for in Section 44B of the Indian I.T. Act, 1922, as it then stood, viz., on one-sixth of its Indian earnings as and when its ships had called at the Indian port. But since 1936-37 assessment year, it had been assessed through its Indian agent, viz., United Liner Agencies of India Ltd., and since then the company had been furnishing separate accounts in respect of its vessels which touched one or more of the Indian ports during a particular previous year and so far as the appeal before the Tribunal was concerned, viz., the appeal for the assessment year 1958-59, similar accounts had been filed in respect of all vessels which had plied in the Indian waters and called at Indian ports during the calendar year 1957, which was the previous year for the assessment year 1958-59. The Tribunal noted that admittedly the assessee-company had never furnished its annual accounts in respect of its world business before the department; but this fact had got no bearing so far as that appeal was concerned before the Tribunal. The method of maintaining separate accounts in respect of each trip of a particular vessel had been interpreted before them by both the parties to that appeal as the "round voyage" method of accounting. The Tribunal further noted that it was an admitted fact that a particular ship starting from its home port might take less than a year or more than a year to complete the round voyage back to its port of sailing and in all such cases the accounts in respect of each voyage were made up on the basis of the actual number of days that would be required to complete the voyage. In other words, the receipts and expenses shown in each of such separate accounts related to the number of days of the particular voyage. Under Rule 33 of the Indian I.T. Rule, 1922, the assessee-company was liable to pay tax on such proportion of its net profits as could be reasonably attributable to its Indian operations and where the round voyage method was adopted, the assessment was to be made by first determining the ratio of the net profits of each voyage to the total gross earnings of that voyage and then applying the same ratio to the gross Indian freight earnings. Such apportionment of the profits of each round voyage had also been furnished to the department, according to the assessee-company, in respect of all the ships that had touched the Indian ports during the calendar year 1957. The Tribunal further noted that it would be evident from such statement that although the previous year adopted for the purpose of the assessment in that case was the calendar year 1957, the profits of certain vessels had been worked out for a period exceeding 365 days while that in the case of others related to periods less than a year and what was ultimately brought under assessment was the net freight earnings of all the ships which had called at the Indian ports at any time. The main point in that appeal was the claim for depreciation on certain vessels which were borne on the assessee-company's fleet for more than 20 years even though they had been serving in India for lesser periods. Following certain instructions in the form of notes for the guidance of the departmental officers issued by the Central Board of Revenue, both the ITO as well as the AAC held the view, that in view of the fact that no depreciation could be allowed on the cost of the ships which had been on the assessee's. fleet for more than 20 years counting from the first year in which the said ships had been on the company's fleet and as such from the year in which the profits receivable on such operations became first liable to tax under the Indian I.T. Act, 1922. These instructions, entitled "Notes on the Indian Income-tax Act, 1922, the Rules made under that Act and other statutory provisions and orders concerned with the imposition of Income-tax" as corrected up to 30th September, 1949, were published by the Central Board of Revenue as Part III of the Income-tax Manual, 10th Edn., but were not reprinted in the subsequent issues of the Manual. The relevant part of the notes appearing at page 538 were placed before the Tribunal and were also produced before us at the hearing of this reference. It is not necessary to set out in detail the said Rules which were published in 1940. Rule 33 provided that certain procedures had to be followed. The said instructions really provided the manner of ascertaining the income, profits or gains of a non-resident person when the actual amount of his income, profits or gains chargeable to tax in British India could not be arrived at and the relevant instructions dealt with the foreign shipping company carrying on business in British India, the methods that should be followed for the purpose of calculating their income, as indicated in the said rule. The assessee had contended before the AAC that the word "company's fleet" mentioned in the aforesaid note would only refer to the fleet employed in the Indian waters since the tax under the I.T. Act was based on the profits earned out of the assessee's Indian trade and not world trade. Therefore, it was urged that the composition of the fleet in respect of the non-Indian business had no relationship or relevancy in the matter of allowance of depreciation under the provisions of the Act and the Rules made thereunder. The AAC, however, in the year under appeal before him for the assessment year 1958-59 confined himself only to the language used in the notes and held that the word "fleet" referred to all ships of the company irrespective of whether these were employed on Indian trade or elsewhere and there was no warrant for assuming that depreciation should cease only if a particular vessel had been in India for twenty assessment years. The AAC in that order, therefore, confirmed the order of the ITO, who had disallowed the depreciation claimed under Section 10(2)(vi) of the Indian I.T. Act, 1922, on all such ships, as had been borne on the assessee-company's fleet, for more than 20 years after the profits yielded by them became first liable to assessment under the Indian I.T. Act, 1922. It was contended before the Tribunal in that appeal for the assessment year 1958-59 relying on the provisions of Section 10(2)(vi) of the Indian I.T. Act, 1922, by the assessee-company that unlike the case of other business assets on which depreciation was allowed annually on the written down value, as explained in Sub-section (5) of the same section, depreciation in respect of ships employed by a shipping company had to be allowed on the original cost of the ships at the rate prescribed under the Rules made under the Act and the only limitation imposed on the allowance of such depreciation on ships had been provided for in prov. (c) to the same Clause (vi) of Sub-section (2) of Section 10 of the Indian I.T. Act, 1922. The proviso, according to the assessee-company, said that the aggregate of all allowances in respect of the depreciation should, in no case, exceed the original cost of the asset to the assessee. Attention was drawn to Section 57 of the Indian I.T. Act, 1922, which gave power to the Central Board of Revenue for making Rules under the Act as well as item 1(a) of Rule 8 which prescribed the rate for ocean-going steamers at 5 per cent. subject to variations, as provided for in Appx. A to the said Rules for increased rates during war time, special rates for second hand vessels and other provisions. It was contended on behalf of the assessee-company that in so far as the instructions curtailed the power of granting depreciation as provided in the section, the said instructions were ultra vires the Act and could not be valid. The Tribunal accepted that argument and the Tribunal was of the view that the depreciation had to be worked out on the basis of the section and in so far as the instruction curtailed the amplitude of the depreciation granted by that section the instructions were not binding. Proceeding on that basis the assessee's appeal was allowed by the Tribunal. Out of this there was a reference to this court and the case which came up before this court is now reported in the decision of this court in the case of CIT v. Wilh Wilhelmsen Lines Ltd. [1978] 115 ITR 10. We shall deal with the decision presently. But before we do that, in order to complete the narration of events so far as the facts relating to the pending reference before us are concerned, following the aforesaid decision, the Tribunal also allowed the assessee's contention in the appeal for the assessment year 1963-64, and thereafter under Section 256(1) of the I.T. Act, 1961, has referred the question, as we have indicated before.;