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 & Mindore, which were acquired in 1941 and have, therefore, completed twenty years in the assessment year 1961-62.
Depreciation is allowed as under :
Original cost of vesselsS Kr. 237,331,047Loss cost of Bali & MindoreS Kr. 9,245,040
S Kr. 228,086,007
He, thereafter compueted the total income as under:
' Depreciation @ 5% on S. Kr. 228,086,007 11,404,300World shipping income S. Kr. 5,216,913World gross shippingincome S. Kr. 142,309,418Gross Indian freight : Rs. 44,62,000Profit applicable to India 5,216,913-------------- X Rs. 44,62,000142,309,418= Rs. 1,63,572Total income = Rs. 1,63,572 ' With the other items, we are not concerned.
3. 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.
4. 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.'
5. 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 ?'
6. In I.T. Reference No. 670A of 1972 for the two assessment years, viz., 1964-65 and 1965-66, the questions referred are as under :
'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?'
7. 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 . : [1978]115ITR10(Cal) . 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.
8. So far as I.T. Reference No. 670A of 1972 is concerned, the same relates to, as we have mentioned before, two assessment years, viz., assessment years 1964-65 and 1965-66. The facts are more or less the same except that for the assessment year 1964-65, ships involved were Bali, Mindore and Travancour and for the assessment year 1965-66, four ships were involved, viz., Bali, Mindore, Mangalore and Travancour. The other facts were more or less the same except that the AAC did not accept the view of the assessee-company, that depreciation was admissible, on the ground that the ships were acquired more than twenty years prior to the commencement of the relevant assessment year and the rate of depreciation on original cost was normally only for a period of 20 years. The Tribunal, however, following the order for the previous year, allowed the appeal.
9. The AAC gave detailed reasons and, therefore, it would be relevant for the present purpose to refer to the AAC's order. The AAC dealing with the appeal for the assessment year 1964-65 noted the contention on behalf of the assessee. He recorded that the authorised representative of the assessee did not dispute the proposition that under the I.T. Act a ship was entitled to depreciation for a period of 20 years only. But It was submitted on behalf of the assessee that three ships for that year under consideration did not touch the Indian ports during the war period, that is to say, April, 1940, to December, 1945, and, therefore, these were not allowed any depreciation during that period. He argued that as no depreciation had been actually allowed on these ships during this period, the period should be excluded in counting the period of 20 years for which the depreciation is admissible on ships. For the assessment years 1962-63 and 1963-64, the AAC pointed out, the ITO had disallowed depreciation on certain ships after relying on the provisions of Section 34(2) of the I.T. Act, 1961, and he set out from his order. But according to the AAC, in the instant appeal for those years, the provisions of Rule 10 of the Indian I.T. Rules were not taken into consideration. That rule, according to the AAC, also provided that, if in any case the actual amount of income accruing or arising to any non-resident person in India could not be definitely ascertained, the amount of such income might be calculated by any of the following methods. It may be relevant to set out portions of the order dealing with the three methods. The three methods were :
''(i) At such percentage of the turnover accruing or arising in India as the Income-tax Officer may consider to be reasonable, or
(ii) On any amount which bears the same proportion to the total profits and gains of the business of such person, as the receipts accruing or arising in India bear to the total receipts of the business, or
(iii) In such manner as the Income-tax Officer may deem suitable. In the case of the appellant the method mentioned at Sl. No. (ii) is being applied for determining its income accruing or arising in India. Under this method, first of all, the total world income of the appellant-company is determined. The computation of the world income is made in accordance with the provisions of the Income-tax Act, 1961. After determining world income, the ratio of freight realised in India to the total world freight is determined. The taxable income is then worked out by applying this ratio to the total world income. From the provisions of Rule 10, it is clear that in the case of a non-resident company depreciation is allowed only for the purpose of determining its total world income. As the Indian income of a non-resident company is determined at a certain percentage of the total world income, the provisions of Section 34(2) cannot be applied in its case. The provisions of the section can be applied only in a case where an assessee has been allowed deduction in respect of depreciation under Section 34(1). However, in the case of a non-resident company depreciation is never allowed as a separate deduction in the computation of its income assessable under the Indian Income-tax Act and, therefore, the question of applying the provisions of Section 34(2), in its case, does not arise. Under Rule 10, the total world income of a non-resident person is computed in accordance with the provisions of the Income-tax Act and, therefore, in my opinion, in the case of a non-resident person, the provisions of Section 34(2) can be applied only at the stage of determining his total world income. While working out the total world income of a nonresident, the fact that in a particular year a ship did not visit India, would not make any difference so long as it was used for the purpose of the business of the non-resident person. The three ships in question might not have touched any Indian port during the war period but as they were used by the appellant-company for the purpose of its business, it cannot be said that they were not allowed any depreciation for the war period. Therefore, in my opinion, the war period cannot be excluded for the purpose of counting the period of 20 years for which the depreciation is admissible on ships.'
10. In the year under consideration Rule 10 (ii), according to the AAC, was being applied for determining its income accruing or arising in India. Under this method, first of all the world total income of an assessee had to be determined. The computation of that world income had to be made in accordance with the provisions of the I.T. Act, 1961. After determining the world income the ratio of freight realised in India to the total world income freight had to be determined. The taxable income had to be worked out by applying this ratio to the total world income. From these provisions of Rule 10, according to the AAC, it was clear that in the case of a non-resident company depreciation was allowed only for the purpose of determining its total world income. As the Indian income of a nonresident company was determined at a certain percentage of its total income, the provisions of Section 34(2) of the I.T. Act, 1961, could not be applied in that case; according to the AAC, under the provisions, the section could be applied only in case where an assessee had not been allowed deduction in respect of the depreciation under Section 34(1) of the I.T. Act, 1961. But the AAC so viewed that in the case of a non-resident company depreciation was never allowed as a separate deduction in the computation of his income assessable under the Indian I.T. Act and, therefore, the question of applying the provisions of Section 34(2) in that case did not arise. Under Rule 10, the AAC so viewed the total income of a non-resident person that it had to be computed in accordance with the provisions of the I.T. Act, and, therefore, in his opinion in the case of a non-resident person the provisions of Section 34(2) of the I.T. Act could be applied only at the stage of determining his total world income. While working out the total world income of a non-resident company the fact that in a particular year a ship did not visit India would not make any difference so long as it was used for the purpose of the business of the non-resident person. The three ships which are material for the assessment year 1964-65 might not have touched any Indian port during the war period at all, as these were used, according to the AAC, by the assessee for the purpose of its business and it could not be said that these were not allowed any depreciation for the war period. Therefore, in his opinion, this war period could not be excluded for the purpose of counting the period of 20 years. The next portion of the order of the AAC is also in my opinion relevant. It will be, therefore, necessary to set out the said portion. The AAC observed, inter alia, as follows :
'The appellant's counsel has submitted that during the war period, no ship of the appellant-company visited India and, therefore, there was no assessment in its hands for any of the years falling within this period. He has contended that as there were no assessments for these years, no depreciation was actually allowed to the appellant-company even for the purpose of determining its total world income. I, however, do not find any force in this contention. The fact that none of the ships of the appellant-company visited India during the war period does not mean that these ships were not utilised by the appellant-company for the purpose of its business. Actually speaking, at the time of hearing, I was informed by the appellant's counsel that during the war period, these ships have been requisitioned by the Govt. which was paying for the ships and paying the freight to the appellant. As the appellant had operated these ships for the purpose of its business even during the war period, a computation of its world income must have been made and, therefore, the appellant must have been allowed depreciation on the ships. As the freight realised in India was 'nil' in these years, the Income-tax Officer may not have made any assessment but from this fact it does follow that there was no computation of its world income for the war period.'
11. It is clear from the aforesaid observations that the assessee had no Indian income at all for the war period. This finding of the AAC had not been controverted at any time and this finding of the AAC has also been made a part of the statement of the case in [the form of 'annexure' to the order of the AAC with the statement of case. Thereafter, the AAC had indicated the failure of the argument urged on behalf of the assessee by three hypothetical cases which it is not necessary for my purpose to set out in detail. The AAC further went on to observe that because during the war period these ships did not visit India they could not be excluded for calculating depreciation. There was an appeal for these two years. In the next year, the same point was canvassed. For all these years, the Tribunal following its decision in Income-tax Appeal No. 5267 (Cal) of 1969-70, which related to the order of the assessment year 1958-59, which we have mentioned in extenso before, held that depreciation allowance on the ships to the extent prescribed in Appx. I in terms of Rule 5 of the I.T. Rules, 1962, subject only to the limitation prescribed by Section 34(2)(i) would be attracted.
12. In this connection, it would be relevant to refer to the relevant sections of the Act. Section 34 of the I.T. Act, 1961, dealt with depreciation and Sub-section (1) of Section 34 provided that in the case of depreciation of ships, not plying in inland waters, the depreciation shall, subject to the provision of Section 34, be allowed on the actual cost thereof to the assessee as may, in any case or a class of cases in respect of any period or periods be prescribed in the Income-tax Rules. Further, the proviso to that Clause provided that different percentages might be prescribed for different periods having regard to the date of the acquisition of the ships. Section 34 dealt with the condition for depreciation allowance and development rebate and Section 34(2) provided that in no case the depreciation allowance should exceed more than the actual cost to the assessee. It is relevant to set out the actual terms of Sub-section (2) of Section 34, which provides as follows :
'34. (2) For the purposes of Section 32-
(i) the aggregate of all deductions in respect of depreciation made under Sub-section (1) or Sub-section (1A) of Section 32 or under the Indian Income-tax Act, 1922 (XI of 1922), or under any Act repealed by that Act or under the Indian Income-tax Act, 1886 (II of 1886), shall, in no case, exceed the actual cost to the assessee of the building, machinery, plant, furniture, structure or work, as the case may be.
Explanation.--Where a capital asset is transferred-
(i) by a holding company to its subsidiary company or by a subsidiary company to its holding company, or
(ii) by a company to another company in a scheme of amalgamation,
and the condition specified in Clause (iv) or Clause (v) or, as the case may be, Clause (vi) of Section 47 are satisfied, then, in determining the aggregate of all deductions in respect of depreciation under this clause, account shall also be taken of the deductions in respect of depreciation allowed in the case of the company from which the asset has been transferred ;
(ii) nothing in Clause (i) or Clause (ii) or Clause (iv) of Sub-section (1) of Section 32 shall be deemed to authorise the allowance for any previous year of any sum in respect of any building, machinery, plant or furniture sold, discarded, demolished or destroyed in that year.
(iii) nothing in Clause (i) of Sub-section (1A) of Section 32 shall be deemed to authorise the allowance for any previous year of any sum in respect of any structure or work in or in relation to a building referred to in that Sub-section which is sold, discarded, demolished or destroyed or is surrendered as a result of the determination of the lease or other right of occupancy in respect of the building in that year.'
13. It is necessary to refer to Section 43(1) of the Act for the purpose of definition of 'actual cost', which provides as follows :
'43. In Sections 28 to 41 and in this section, unless the context otherwise requires-
(1) 'actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority :......'
14. We are excluding the provisos which are not relevant for our present purpose. Sub-section (6) of Section 43 of the Act provides the definition of 'written down value' which is as follows:
'(6) 'Written down 'value' means-
(a) in the case of assets acquired in the previous year, the actual cost to the assessee ;
(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (XI of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force :
Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of Clause (ii) of Sub-section (1) of Section 32, 'depreciation actually allowed' shall not include depreciation allowed under Sub-clauses (a), (b) and (c) of Clause (vi) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922 (XI of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said Clause (vi)...... '
15. It is also not necessary to refer to the Explanations, except Explanation 3, which is to the following effect:
'Explanation 3.--Any allowance in respect of any depreciation carried forward under Sub-section (2) of Section 32 shall be deemed to be depreciation 'actually allowed '.'
16. Section 5 of the Act includes 'subject to the provisions of this Act', the total income of any previous year of a person who is a non-resident, all income from whatever source derived. Sub-section (2) of Section 5 of the Act which deals with the total income of a person who is not resident, provides as follows :
'(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1.--Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance-sheet prepared in India.
Explanation 2.--For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.'
17. Rule 10 of the I.T. Rules, 1962, which is equivalent to Rule 33 of the Indian I.T. Rules, 1922, provides as follows :
'10. Determination of income in the case of non-residents.--In any case in which the Income-tax Officer is of opinion that the actual amount of the income accruing or arising to any non-resident person, whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to income-tax may be calculated:
(i) at such percentage of the turnover so accruing or arising as the Income-tax Officer may consider to be reasonable, or
(ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business, or
(iii) in such other manner as the Income-tax Officer may deem suitable.'
18. Therefore, it appears to us that in respect of the depreciation subject, however, to the embargo as provided by Sub-section (6) of Section 43 of the Act, that is to say, the depreciation allowed under the Act will not exceed the actual cost of the asset, depreciation would be allowable under the Act. Even read with Rule 10, depreciation must be in accordance with the provisions of the Act and must have relevance to the written down value under the Act. In this connection, Sub-section (2) of Section 34 makes it quite clear that the aggregate of all the deductions in respect of the depreciation made under Sub-section (1) or Sub-section (1A) of Section 32 or under any Act repealed by that Act shall not exceed the actual cost to the assessee of the building, machinery, furniture or structure, as the case may be. Therefore, in order to exclude depreciation, it must be, however, the depreciation under any of the provisions mentioned in Clause (i) of Sub-section (2) of Section 34 of the Act. Now, Rule 10 of the present Rule, which is similar to Rule 33 of the Indian I.T. Rules, 1922, provides for three different methods-
(i) at such percentage of the turnover so accruing or arising as the ITO may consider to be reasonable ;
(ii) or any amount which bears the same proportion to the total profits or gains of the business of the same person as the receipts so accruing or bearing to the total receipts of the business ; and
(iii) in such other manner as the ITO may deem suitable.
There are three different procedures envisaged under Rule 10.
19. As we have mentioned before, the decision of the Tribunal for the assessment year 1958-59 came up before this court in the case of CIT v. Wilh Wilhelmsen Lines Ltd. reported in : [1978]115ITR10(Cal) . There the Tribunal had decided only the question whether any instruction which was contrary to the section or the rules made by the CBDT or the CBR would be binding or not. The court examined the question whether depreciation had been properly allowed in that case. There three questions were referred to this court, viz. (p. 12):
'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 facts 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 account of excess depreciation in respect of the vessel 'Tortugus ' ?
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 ?'
20. After setting out the facts, the court recorded in that case that the assessment had been done under the third method of Rule 33 (see p. 15 of the report : [1978]115ITR10(Cal) ). In the instant case before us, as has been noted by us from the order of the AAC, the assessment had not been done under Sub-rule (in). Indeed, that is the common case of both the parties. Secondly, it has to be borne in mind that the decision in the case of CIT v. Wilh Wilhelmsen Lines Ltd. : [1978]115ITR10(Cal) was in respect of the assessment made under the Indian I.T. Act, 1922. The instant assessment, which is under reference to this court, was made under the Indian I.T. Act, 1961. Consequence of this point would be appreciated if we refer to the provisions of Section 297(2)(k) of the I.T. Act, 1961. The said Section 297 repeals the Indian I.T. Act, 1922, but by Sub-section (2) subject to the conditions mentioned in the different clauses, and Clause (k) provides as follows:
'(k) any agreement entered into, appointment made, approval given, recognition granted, direction, instruction, notification, order or rule issued under any provision of the repealed Act shall, so far as it is not inconsistent with the corresponding provision of this Act, be deemed to have been entered into, made, granted, given or issued under the corresponding provision aforesaid and shall continue in force accordingly.'
21. It has been urged before us that in the corresponding section of the I.T. Act, 1922, there is no such clause. The effect of this clause, as I read it, is that any instruction or notification or direction issued under the provisions of the repealed Act so far as it is not inconsistent with the corresponding provisions of this Act, viz., the Act of 1961, is deemed to have been entered into, made, given or issued under the corresponding provision of this Act and should continue in force. Therefore, any instruction issued under the old Act or any notification issued under the old Act can only continue after the coming into operation of the Act of 1961, provided such instructions were not inconsistent with any provision of the I.T. Act, 1961. It was urged before us that there was no such similar provision in the Indian I.T. Act, 1922. This proposition was not disputed on behalf of the revenue, before us. But what was urged before us was that under Clause (k) of Sub-section (2) of Section 297 in order to invalidate (the instructions) there must be repugnancy between the provisions of the Indian I.T. Act, 1922, and the I.T. Act, 1961. It was urged that there was no such repugnancy between the instructions under the old Act and the relevant provisions of the Act of 1961 that would make such instruction inoperative by virtue of repugnancy. We are, however, unable to accept this contention. It appears to us that, in order to survive the repeal, the instructions must not be inconsistent with any corresponding provisions of the present Act. Now, the basis upon which the assessment has been made and the revenue's case for disallowing the depreciation which is allowable under Section 32 read with Section 34(2) and Section 43(i) and Section 43(vi) with Rule 10 of the I.T. Rules, 1962, appears to be an instruction issued by the CBDT. It is not necessary to set out the instruction in detail.
22. In the case of CIT v. Wilh Wilhelmsen Lines Ltd. : [1978]115ITR10(Cal) it has been observed at page 16 of the report: 'The instructions in Ellerman's case : [1971]82ITR913(SC) and in C. Javeri's case : [1965]56ITR198(SC) and also the instructions before us are inconsistent with the provisions of the Act', meaning thereby the Indian I.T. Act, 1922. Therefore, the court accepted the position that the instructions were inconsistent with the Act. Learned advocate for the revenue, however, submitted that those instructions were not really inconsistent with the provisions of the Act but they were not in conformity with the provisions of the Act and had been made to supplement the carrying out of the Act or giving effect to the provisions of the Act. We are unable to accept this contention. Instructions, in so far as these curtailed the amplitude of the provisions of the Act read with the definition of 'written down value' in respect of depreciation as allowable under Section 32 subject to the embargo put under Section 34(2) of the I.T. Act, 1961, were inconsistent with the Act, in the sense if one was given effect to, why the other could not be.
23. In the said case of CIT v. Wilh Wilhelmsen Lines Ltd. : [1978]115ITR10(Cal) , the Division Bench at page 17 of the report further observed that the instructions were binding on the I.T. authorities and the court acting under the reference jurisdiction. This proposition, in our opinion, in view of certain pronouncements of the Supreme Court, requires a little detailed consideration. If the instructions are binding on this court, in any reference jurisdiction, then of course different considerations will apply. But the question is whether the instructions issued by the CBDT which are in conflict with the provisions of the Act or which in any matter curtailed any provisions of the Act, are binding in the proceeding or are they enforceable in any court including the court exercising the jurisdiction under Section 256 of the I.T. Act, 1961 This question has been dealt with in several decisions. We may first refer to the decision in the case of CIT v. K. Srinivasan and K. Gopalan [1953] 23 ITR 87. There, the Supreme Court observed that the interpretation placed by the department on the section, viz., directions contained in the Income-tax . v. CBDT : [1972]83ITR335(SC) . There, the Supreme Court observed, the CBDT was not competent to give any direction regarding the exercise of any judicial power by any subordinate authorities. Though, in that case, the instructions related to a specific matter, Mr. Justice Hegde observed that the Board was not competent to give the direction regarding the exercise of any judicial power by any subordinate under the Indian I.T. Act, 1922. We mention here that the observations of the Supreme Court were in general terms. We mention this fact because learned advocate for the revenue sought to urge that though the instruction regarding the exercise of the particular judicial discretion in a particular case might not be binding, yet a general instruction on any interpretation of law would be binding on the authorities as well as on the court. In this case, though the instructions were regarding a specific case, the observations of the Supreme Court were in respect of general instructions as such.
24. In the case of Sirpur Paper Mills Ltd. v. CWT : [1970]77ITR6(SC) , the Supreme Court observed that the power of revision conferred by Section 25 of the W.T. Act was not administrative but quasi-judicial. In the exercise of that power, the Commissioner must bring to bear an unbiased mind in considering impartially the objections raised by the aggrieved party and in deciding the dispute according to the procedure consistent with the principles of natural justice. He could not permit his judgment to be influenced by matters not disclosed to the assessee. The Supreme Court further observed that the orders, instructions and directions of the CBDT contemplated by Section 13 of the W.T. Act, 1957, might control the exercise of the power of the officers of the department in matters administrative but not quasi-judicial. Indeed, in Section 119A of the I.T. Act, 1961, it has been categorically provided that no such instruction should be given under the I.T. Act which hampers the exercise of judicial discretion by any judicial authorities (sic). In this case also, the instruction was not in respect of a specific matter but was in respect of a general instruction.
25. In the case of Gestetner Duplicators P. Ltd. v. CIT : [1979]117ITR1(SC) , the Supreme Court observed that the circular dated 16th January, 1941, could not affect the question of deductibility of contribution because when a question of interpretation fell, the circular or a direction could not be permitted to curtail the provisions of the Act. At page 13 of the report, the nature of the circular had been set out and it would be apparent from the nature of the circular that the circular was not in respect of a specific matter but was of a general nature.
26. In the case of Smt. Bhagirathi Devi Jalan v. CIT : [1978]112ITR534(Cal) , the question was what would be the period of limitation of action under Section 33B of the Indian I.T. Act, 1922. There, whether the order of the Commissioner in revision was in time or not, was not the question but it was a question whether an opportunity of hearing was to be given. On an appeal, the Tribunal remanded the case with a direction to pass an appropriate order. It was held that the period of limitation would not apply to any subsequent order. There, the court did not follow the decision of the Division Bench in the case of National Taj Traders because of the subsequent pronouncement of the Supreme Court.
27. In the instant case, in view of the fact that several decisions on the question of enforceability of the instructions to which the attention of the learned judges of the Division Bench was not drawn while deciding the case of CIT v. Wilh Wilhelmsen Lines Ltd. : [1978]115ITR10(Cal) , we cannot accept the proposition that the instructions 'were binding on the court' exercising reference jurisdiction even if these were contrary to the Act. It is true, whenever there was any instruction, which is in favour of the assessee, the I.T. authorities or those who were in charge of the execution of the I.T. Act would not be permitted to go back on those instructions or circulars because there was some kind of representation made to the assessee and so the I.T. authorities could not be allowed to approbate and reprobate and they were estopped from disputing the policy enunciated in the instructions or the circulars. But that does not mean that such a provision entitled the I.T. authorities including CBDT to issue instructions or circulars curtailing the provisions of the Act or curtailing the relief to which the assessee is otherwise entitled under the law.
28. Our attention was drawn by the learned advocate for the revenue to a decision of the Delhi High Court in the case of J. K. (Bombay) Ltd. v. CBDT : [1979]118ITR312(Delhi) . There, the Division Bench observed that the views expressed by the CBDT as to the meaning of 'technical services' was both a question of law and a question of judgment. That was because the Board was the primary authority in giving the meaning to the words 'technical services' and if this judgment had to be ordinarily of the Board and if the court was not sitting in appeal over that judgment in judicial review, interference with the judgment of the Board would not be called for, unless that judgment was apparently wrong. If a reasonable view was adopted by the Board, no reason would warrant interference with it. But it has to be borne in mind that these observations were made in an entirely different context. There, for certain purposes, the CBDT was made the reviewing authority and in adjudicating that dispute if it had proceeded in valid principle and it had pronounced a question of law, and such a decision was not perverse, then such a decision was not open to judicial review. This decision has nothing to do with the proposition whether the CBDT that issued the administrative direction could curtail the provisions or the operation of the Act.
29. Reliance was also placed on certain observations of the Bombay High Court in the case of Kirtilal Jaisinglal & Co. v. CIT : [1980]121ITR279(Bom) . There, the Bombay High Court dealt with a circular issued by the CBR which stated that the intention of Clause (a) of the proviso to Explanation 2 to Section 24(1) of the Indian I.T. Act, 1922, had always been that where bona fide forward sales were entered into with a view to guarding against the risk of raw materials or merchandise in stock falling in value the losses arising as a result of such forward sales should not be treated as speculative losses (at p. 284). Accordingly, such transactions should not be treated as speculative transactions within the meaning of Explanation 2 to Section 24(1) of the said Act. The circular further stated that the hedging sales could be taken to be genuine only to the extent the total of such transactions did not exceed the total stocks of raw materials or merchandise in hand. If the forward sales exceeded the ready stock, the losses arising from the excess transactions should be treated as losses arising from speculative transactions and not from genuine hedging transaction. There, the context of the issue of the circular was entirely different.
30. Here the position of the circular is entirely different. This question also fell in for consideration in the case of Ellerman Lines Ltd. v. CIT : [1971]82ITR913(SC) . That was a case where the appellant, a nonresident British shipping company, whose ships plied in waters all over the world including Indian waters, was assessed in respect of its Indian income for the calendar years 1959 and 1960 relevant to the assessment years 1960-61 and 1961-62, on the basis of the ratio certificates issued by the Chief Inspector of Taxes of the U.K. During the relevant periods there was in the U.K. an 'investment allowance' corresponding to 'development rebate' under the Indian I.T. Act, 1922. The certificate issued by the U.K. Chief Inspector contained the percentage ratios of the total world profits of the appellants, the wear and tear allowance and the investment allowance to its total world earnings. Purporting to assess the appellant on the second of the three bases provided in Rule 33 of the I.T. Rules, 1922, the ITO took only the percentage ratio of the total world profits and the wear and tear allowance but did not take into account the investment allowance. Having regard to the instructions of the Central Board dated February 10, 1942, which permitted British shipping companies to elect to be assessed on the basis of the ratio certificates granted by the U.K. authorities, and also in view of the reply of the Board to Turner Morrison and Co., which was the agent of several British companies, in which the Central Board had stated that there was no objection to allowing the investment allowance for the purpose of the computation of the Indian income of British shipping companies, the Appellate Tribunal held that the investment allowance should also be taken into account. These instructions of the Central Board were, however, given prior to the proviso being added to Section 10(2)(vib) of the Indian I.T Act, which required 75% of the development rebate to be credited to a separate reserve account to be maintained for a period of years.
31. It was held by the Supreme Court that proceeding on the assumption that Rule 33 applied (headnote):
'(i) that the income or loss referred to in the instructions dated February 10, 1942, meant the net income or net loss ;
(ii) that the assumption that the computation of the appellant's income had to be made on the second of the three bases mentioned in Rule 33 was incorrect. The second of the three bases mentioned in Rule 33 could not apply and the fact that the authorities under the Act as well as the parties were under a mistaken impression could not alter the true position in law. Therefore, the appellant's income had to be computed either under the first or under the third basis and since the officer did not adopt the first basis, the most appropriate basis under which he could have computed the income was the last basis, namely, 'in such manner as the Income-tax Officer may deem suitable' ;
(iii) that the Tribunal's decision that in computing the Indian income on the basis of the ratio certificate given by the U.K. authorities the investment allowance should be taken into account was a reasonable decision and it accorded with the instructions given by the Board ;
(iv) it further held that the fact that the proviso to Section 10(2)(vib) was incorporated in the Income-tax Act, 1922, after the Board had issued its instructions, did not affect either the validity of Rule 33 or the force of the instructions, issued by the Board because neither Rule 33 nor the instructions issued by the Board were strictly in accordance with Section 10(2): they merely laid down certain just and fair methods of approach to a difficult problem.'
32. The Supreme Court further observed while adopting the third basis under Rule 33 of the I.T. Rules, 1922, for computing the income of a nonresident, namely, 'in such other manner as the Income-tax Officer may deem suitable', the ITO was not required to apply rigidly the various conditions prescribed in the Act in the matter of granting one or the other of the permissible allowances. He might adopt any equitable basis so long as that basis does not conflict either with Rule 33 or with the instructions or directions given by the Board of Revenue. The power given to the ITO under that basis is a very wide power. That power is available not only to the ITO but also to the AAC and the Tribunal. The Supreme Court noted at page 920 of the report that the learned Solicitor-General appearing for the revenue at one stage of his arguments had contended that the instructions issued by the Board of Revenue could not have any binding effect and those instructions could not abrogate or modify the provisions of the Act, but he did not contend that Rule 33 was ultra vires the Act, and according to the learned Solicitor-General, the instructions in question merely laid down the manner of applying Rule 33. The Supreme Court, thereafter, at page 921 of the report, observed :
'Now coming to the question as to the effect of the instructions issued under Section 5(8) of the Act, this court observed in Navnit Lal C. Javeri v. K.K. Sen, AAC : [1965]56ITR198(SC) :
'It is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act under Section 5(8) of the Act. This circular pointed out to all the officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision.'
The directions given in that circular clearly deviated from the provisions of the Act, yet this court held that the circular was binding on the Income-tax Officer.'
33. The Supreme Court, therefore, upheld the order of the Appellate Tribunal and answered the question in favour of the assessee. This first decision ( : [1971]82ITR913(SC) ) upheld that the third basis under Rule 33 which is equivalent to Sub-rule (iii) of the new rule (Rule 10 of the I.T. Rules, 1962) permitted assessment in case of difficulty in such manner as the ITO might deem suitable. In that case having regard to the conduct of the parties the Supreme Court agreed that the basis taken by the ITO was suitable. That was permissible under Rule 10 of the I.T. Rules, 1962, which is in pari materia with the third basis of Rule 33 of the Indian I.T. Rules, 1922. But in the case of an assessment being made under the second basis such discretion is not given either to the ITO, and in this case, as has been noted by the AAC, the third basis of Rule 10 had not been attracted nor it is the case of revenue that in the instant case, as regards powers, the third basis had been attracted. There is, however, a more fundamental difference in this case, that is to say, the fact that it emerged from the AAC, that is to say, for all these, years it is hot a question as to whether a particular ship was on the fleet of the assessee-company or had carried on business ; but for 7 years, namely, 1939 to 1945, the assessee-company was not assessed at all under the Indian I.T. Act, 1922. Therefore, in view of the language used in Sub-section (2) of Section 34, in our opinion, where an assessee-company had not been assessed at all, irrespective of whether a particular ship was on the fleet or of the ships belonging to the assessee-company touched the Indian port or not, in respect of those years, the assessee would not be deprived of the right to claim deduction which it is otherwise entitled to under the law.
34. In this connection, reference may also be made to the decision in the case of the Bombay High Court in Hukumchand Mills Ltd. v. CIT : [1963]47ITR949(Bom) , where the assessee was assessed as a non-resident and its income liable to Indian income-tax was computed at a proportion by the application of Rule 33 of the Indian I.T. Rules, 1922, it was held that only that part of the depreciation as had entered into the computation of the income liable to tax under the Indian I.T. Act could be taken into account to determine the written down value of its business assets under Section 10(5)(b) of the Act and not the full depreciation calculated in determining its total world income. At page 955 of the report, the court observed:
'In our opinion, the Tribunal is right in the view that it has taken. Section 10 of the Indian Income-tax Act provides for the computation of the profits or gains of business on which tax is to be paid under the Act. In the computation of these profits, certain deductions and allowances are allowed from the gross profits and one of such deductions is a deduction on account of depreciation of the business assets. The calculation of the amount which is permissible as deduction by way of depreciation is made on the written down value of the assets and, in fixing the written down value of the assets, the rule which is provided by Section 10(5)(b) is that, where an asset has been acquired before the previous year, the written down value will be the actual cost to the assessee less all depreciation actually allowed to him under the Act in prior assessment years.'
35. In this case, if the assessee had not suffered any assessment for all these 5 years then the written down value would not have been allowed any depreciation. In the case of CIT v. Nandlal Bhandari Mills Ltd. : [1966]60ITR173(SC) , the Supreme Court had occasion to consider this aspect where the assessee-company, which was incorporated in Indore, owned and ran a textile mill and some ginning factories. Until April 1, 1950, when the Indian I.T. Act was extended to Part B States, including Madhya Bharat of which Indore became a part, the respondent was for many years assessed at Bombay under the Indian I.T. Act as a non-resident and for some years as a resident. It was also assessed in Indore under the Indore Industrial Tax Rules, 1927. For those years, in which it was assessed as a non-resident under the Indian I.T. Act, only that part of its profits attributable to the sale proceeds of goods received in British India or in regard to which contracts were accepted in British India were brought to tax. For the assessment years 1950-51 to 1953-54 (the accounting years being calendar years 1949 to 1952), in ascertaining the written down value of the building, machinery and plant, under para. 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, only the greater of the two depreciations actually allowed in British India and Indore could be taken into account. The ITO took into account the depreciation allowances for the years up to and including 1944, as computed under the Indian I.T. Act for the purpose of ascertaining the world income of the company, and for the years 1945 to 1948, as computed under the Indore Industrial Tax Rules, 1927, and on that basis he arrived at the written down value as on January 1, 1949. It was contended on behalf of the assessee, inter alia, that in regard to the years up to and including 1944, only the proportionate depreciation attributable to the taxable income was 'actually allowed' within the meaning of para. 2 of the order and could be taken into account. It was held by the majority of the judges of the Supreme Court that in fixing the depreciation allowance for the years in which the respondent was assessed as a non-resident, under the Indian I.T. Act, the ITO had 'actually allowed' only a portion of the amount towards depreciation allowable in assessing its world income. The mere fact that in the matter of calculation the total amount of depreciation was first deducted from the world income and thereafter a proportion was struck did not amount to an actual allowance of the entire depreciation in ascertaining the taxable income that accrued in British India. Therefore, the depreciation deducted in arriving at the taxable income alone could be taken into account and not the depreciation taken into account for arriving at the world income. Therefore, at page 181 of the report, the Supreme Court expressly approved the view of the Bombay High Court in the case of Hukumchand Mills Ltd. v. CIT : [1963]47ITR949(Bom) . Reliance was also placed on another decision of the Supreme Court in the case of CIT v. Straw Products Ltd. : [1966]60ITR156(SC) , where at page 162, the Supreme Court had considered the expression 'actually allowed' and concurred with this view. In the case of Madeva Upendra Sinai v. Union of India : [1975]98ITR209(SC) , the Supreme Court had occasion to consider some of its aspects and at page 223, dealing with the depreciation, the Supreme Court observed, inter alia, as follows :
'The definition of 'actual cost' is to be found in Section 43(1) and that of 'written down value' in Section 43(6). The latter defines it to mean---
(a) in the case of assets acquired in the previous year, the actual cost to the assessee ;
(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the 1922 Act, or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886, was in force. (Emphasis supplied).
36. The pivot of the definition of 'written down value' is the 'actual cost' of the assets. Where the asset was acquired and also used for the business in the previous year, such value would be its full actual cost and depreciation for that year would be allowed at the prescribed rate on such cost. In the subsequent year, depreciation would be calculated on the basis of actual cost less depreciation actually allowed. The key word in Clause (b) is 'actually'. It is the antithesis of that which is merely speculative, theoretical or imaginary. 'Actually' contra-indicates a deeming construction of the word 'allowed' which it qualifies. The connotation of the phrase 'actually allowed' is thus limited to depreciation actually taken into account or granted and given effect to, i.e., debited by the Income-tax Officer against the incomings of the business in computing the taxable income of the assessee ; it cannot be stretched to mean 'notionally allowed ' or merely allowable on a notional basis.
37. Of course, any depreciation carried forward under Section 32(2) is, in view of Explanation 3 to Section 43(6), considered as depreciation 'actually allowed'. But such is not the case here.
38. From the above conspectus, it is clear that the essence of the scheme of the Indian Income-tax Act is that depreciation is allowed, year after year, on the actual cost of the assets as reduced by the depreciation actually allowed in earlier years. It follows, therefore, that even in the case of assets acquired before the previous year, where in the past no depreciation was computed, actually allowed or carried forward, for no fault of the assessee, the 'written down value' may, under Clause (b) of Section 43(6) also, be the actual cost of the assets to the assessee.'
39. The basis of contending for the disallowance of depreciation is that in computing its world income out of which a fraction is computed as the Indian income depreciation is already allowed. Therefore, if the depreciation accrued again is allowed in computing the Indian income then it was urged on behalf of the revenue that it would result in double depreciation. Now, that question might or might not be relevant in considering the case of an assessee in computing its world income when there are many ships which do not regularly touch the Indian port, except where the assessee is regularly assessed to Indian income-tax. But this is not the position here. For the war years there was no assessment in India, and no question of allowing any depreciation for those years arises at all.
40. In view of the position that on the facts as established before the AAC, which is not controverted, and the fact that the order of the AAC has been annexed to the statement of the case, if the assessee, in fact, did not suffer any taxation in India at all for the war years, viz., from April, 1940, to December, 1945, then there is no question of enjoying double depreciation, that is to say, once in the computation of its world income and again in the computation of its Indian income in respect of the ships in question involved in this reference, even though these ships might have been a part of the world fleet of the assessee-company though not actually used in Indian ports for the year in question. If that is the position, then no mischief of double depreciation arises. Then again, on the clear position of application of Rule 10 read with other provisions of the section, we are of the opinion that the Tribunal, in the facts and circumstances of this case, was right in its conclusion.
41. Accordingly, in respect of the I.T. Reference No. 506 of 1972, we answer the question in the affirmative and in favour of the assessee.
42. Similarly, in respect of I.T. Reference No. 670A of 1972, for the assessment year 1964-65, we answer the question in the affirmative. For the assessment year 1965-66, we, similarly, answer the question in the affirmative and in favour of the assessee.
43. In the facts and circumstances of the case, each party will pay and bear its own costs.
Sudhindra Mohan Guha, J.
44. I agree.