- (1.) The following questions are involved in this reference under Section 66(2) of the Indian Income-tax Act, 1922: "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 8 of the Income-tax Rules even in respect of ships which had formed part of the assessee's fleet for more than twenty years?
(2.) Whether, on the fact and in the circumstances of the case, the Tribunal was right in deleting the addition of Rs.55,280/- made by the Appellate Assistant Commissioner on accounts of excess depreciation in respect of the vessel "Tortugas".?
(3.) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the enhancement of Rs.97,547/- to the total income made by the Appellate Assistant Commissioner on account of wrong deduction of unabsorbed depreciation allowed by the Income Tax Officer?" 2.The assessee is a Norwegian Shipping Company. The assessment year involved is 1958-59. The previous year ended on-December 31, 1957. The facts stated by the Tribunal may be briefly stated as follows: (i)Instead of furnishing the annual accounts for its world business for the assessment year 1958-59, the assessee furnished separate complete annual accounts for its Indian trade, that is to say, for all round voyages of each ship to and from the Indian ports. The assessment was made under the third method of rule 33 of the Indian Income-tax Rules, 1922 and the instructions issued under this rule. What was ultimately brought to tax was the net Indian profits of each ship employed in the Indian trade in the accounting year 1957. (ii)In view of the said instructions the Income-tax Officer disallowed depreciation on 8 ships mentioned in his order as those ships were in the assessee's fleet for more than 20 years. (iii)The Income-tax Officer allowed Rs.55,280/- as depreciation in respect of the vessel "Tortugus" for its three round voyages of 195, 150 and 128 days respectively aggregating to 473 days in accounting year. (iv)There was an unabsorbed depreciation of Rs.3,31,493/- in the assessment year 1953-54. Out of that amount, Rs.2,49,093/- was set off against the assessee's income for the assessment year 1957-58. The unabsorbed depreciation of Rs.97,547/- for the assessment year 1953-54 pertained to seven ships mentioned at page 33 of the paper book and those ships did not come to India in the assessment year 1958-59 and only one of the came to India in the assessment year 1957-58. In the books of the assessee the said sum of Rs.97,547/- was shown as a business loss brought forward from the earlier years and the Income-tax Officer allowed it to be set off against the profits for the assessment year 1958-59. (v)On appeal by the assessee, the Appellate Assistant Commissioner sustained the order of the Income-tax Officer regarding the disallowance of depreciation on those 8 ships which were in the assessee's fleet for more than 20 years. (vi)The Income-tax Officer submitted that by mistake he had allowed depreciation for 473 days on the ship "Tortugus" instead of 365 days and therefore depreciation for 108 days should be disallowed. He also submitted that due to mistake he had allowed the set off of Rs.97,547/-. The assessee accepted those contentions and accordingly, the Appellate Assistant Commissioner enhanced the assessment by disallowing the excess depreciation of 108 days on the Tortugus and also by the said sum of Rs.97,547/-. (vii)On further appeal, the assessee contended before the Tribunal that the instructions so far as they relate to disallowance of depreciation on those 8 ships were ultra vires the provisions of section 10(2) (vi), proviso (c) to that section and rule 8 of the Income-tax Rules, 1922. The assessee argued that depreciation on all those ships should be allowed under section 10 (2) (vi) and proviso (c) to that section read with rule 8. It further contended that the words "company's fleet" used in the instructions were referable only to those ships of the assessee which were employed in its Indian trade and therefore the Appellate Assistant Commissioner was wrong in holding that the depreciation allowance on those ships had ceased after the 20th assessment year. (viii)The Tribunal expressed no opinion on the vires of the instructions and held that the instructions were misinterpreted by the Appellate Assistant Commissioner, for, according to the Tribunal the instructions could not go against the provision of Section 10 (2) (vi), proviso (c) to that section and rule 8 of the Rules. The Tribunal accordingly allowed the said claim in the following terms: ". . . . . . Section 10 (2) (vi) is quite clear in providing that depreciation on ships are to be allowed on the original cost and proviso (c) to the same section delimits the total allowance of depreciation from year to year to the extent of such capital cost. Under Rule 8 the rates have been prescribed for the different kinds of ocean-going steamers and vessels. When the depreciation is allowed under the Indian Income-tax Act it follows that in the matter of calculating the overall or total depreciation for the purpose of proviso (c) to section 10(2)(vi) one has also to take into account only such depreciation as has been actually allowed under the Indian Income-tax Act. As such we are not concerned with any notional depreciation or depreciation which might have been provided, in the accounts other than those relevant for the purpose of assessment under the Indian Income-tax Act. This, to our mind, seems to be the most patent and obvious interpretation of section 10(2)(vi). In the case of the present assessee which is assessed on the round voyage method, a particular ship might have called at the Indian port some 25 years back and may be employed for the company's Indian trade for the second time only in the 26th year. That does not mean that the company will not be entitled to depreciation in the 26th years because in the intervening 25 years the ship was evidently not used for purpose of the round voyage via India and as such no depreciation had been allowed under the Indian Income-tax Act except for the first year. *** *** *** In the case of 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 the intimation imposed under proviso (c) to section 10(2)(vi)". (ix)Regarding the "Tortugus", the assessee argued before the Tribunal that the depreciation on that ship for 473 days should be allowed on the basis of "the round voyages" system of accounting adopted by the assessee. Reliance was also placed on the 2nd proviso to rule 8 and though the said proviso is solely confined to the seasonal factories, it was argued on its analogy that depreciation allowance for 473 days should be allowed. On the other hand, the Department contended that under rule 8 depreciation could not only be allowed with reference to the previous year i.e., 365 of 1957 and hence depreciation for more than 365 days should not be allowed. The Tribunal, however, accepted the contentions of the assessee and by following the instructions deleted the addition of Rs.55,280/-. (x)The Tribunal also deleted the addition of Rs.99,547/- by holding that the instructions, though were previously valid, had become obsolete in view of the introduction of section 24(2) in the Act by the Finance Act, 1955 and allowed the assessee's claim in the following terms: "*** *** now under the present law the earlier losses could be set off against the profits and gains of any business, if only the assessee is found to carry on the particular business in respect of which the loss had arisen in earlier years in which the claim for set off is made. In the present case, therefore, since the appellant company admittedly carried on business in shipping year after year and the unabsorbed depreciation relates to that business only, the appellant is legally entitled to claim set off of earlier year's' losses of Rs.97,547/- representing unabsorbed depreciation only, against the profits of the same shipping business as earned and found assessable for the assessment year 1958-59". 3.It is an admitted fact that the assessment was made under the third method of rule 33 and the instructions issued under this rule by the Central Board of Revenue as printed in the Income-tax Manual (10th Ed) and all the authorities concerned have considered the instructions. Mr. Ajit Sengupta, learned junior counsel for the Revenue, drew our attention to Circular No. 35.413-I/T/25, dated August 8, 1925, printed at pages 36 and 37 of the Income-tax Circular Vol-II in support of his senior's contention that the assessee was not entitled to depreciation allowance on those 8 ships.;