1. These are three appeals by the assessee, a foreign shipping company.
The issue involved in these three appeals being the same, we dispose them of by a common order. The issue is whether the depreciation, for which the assessee is entitled to, should be allowed on the basis of the cost as reflected in the books of account in foreign currency or it should be converted into Indian rupee as at the time of acquisition of the asset and depreciation allowed on that figure. The issue gathers importance because owing to the devaluation of the Indian rupee, the present book value of the ships is much more than the equivalent value in terms of Indian rupee in the years in which the ships were acquired.
2. In order to understand the issue, we will explain how the assessee computed the income for the purpose of Indian income-tax. The accounting year followed by the assessee is the calendar year. During the calendar year 1970, some of the ships had touched the Indian ports.
The assessee has an account of the freight earnings from India in respect of these ships. This, however, is part of the freight earnings of the ships for each voyage. One illustration might make the point clear. The ship 'straat clarance' started a voyage on 4-11-1969. The voyage lasted for 51 days. During the course of this voyage, the freight earnings amounted to 490.481 guilders. The total operating expenditure amounted to 499.465 guilders. The freight earned by this ship from Indian ports amounted to 133.622 guilders. The assessee had worked out the pro rata share of the operating expenses in respect of this voyage. This amounted to 133.015 guilders. It would be seen that the assessee suffered a loss of about 9 guilders in the total voyage.
Now, the ratio of the Indian freight receipts to the total receipts came to 26.63 per cent. This is how the pro rata expenditure has been fixed at 133 guilders. The proportionate loss as a result of touching Indian ports came to 2.293 guilders.
3. This ship was built in 1959 and it had been in use since 7-11-1959.
The cost of the ship was f. 14,720,000. Depreciation on straight line method amounting to 5 per cent would be f. 736.000; per day it would amount to f. 2.016. Now, tHe total number of days as stated earlier, in this voyage was 51 days. The depreciation proportionate to this voyage at the rate off. 2.016 per day came to f. 102.838. Now, we have mentioned that the ratio between the earnings from Indian ports and the total earnings of the voyage was f. 26.631. By applying this ratio, the depreciation referable to the ships touching Indian ports amounted to f. 27.387.
4. In this manner, the income arising to the company on account of touching the Indian ports had been calculated. The net result for the whole year is given below:Loss before allowing depreciation as per summary 40,389voyage resultsDepreciation as per statement 4,42,578Balance loss 4,82,967Donations/charities as per specification 1,186allowable 1,515 5,536Balance loss 4,77,431 2,006 Balance loss 4,75,425Converted into rupees at the ratio N. fl. 10,000=Rs. 20,833 Loss Rs. 9.90,453 The above loss of Rs. 9,90,453 was claimed before the ITO in the assessment for the year 1971-72. In the original assessment, the ITO accepted this loss and completed the assessment. It should be noted from the above that the assessee had computed the Indian income in guilders and only after arriving at a loss in terms of guilders of 4,75,425, the Indian equivalent at the current rate of 10,000 guilders, being equal to Rs. 20,833, was arrived at. The depreciation of 4,42,575 guilders had been as per the assessee's books.
5. We have stated that this ship was purchased in 1959. The assessment is in respect of the calendar year 1970. In between the acquisition of the ship and the accounting year, the Indian rupee had been devalued.
Thus, in terms of Indian rupee, the cost of each ship and, therefore, the written down value of each ship was much more during the accounting year than when it was acquired. Had the ship been depreciated on the cost in rupees at the exchange rate prevalent in 1959, i.e., the year of acquisition of the ship, the assessee would be entitled to a depreciation of Rs. 5,64,333. After the-devaluation, the value of the Indian rupee had gone down compared to the guilders and at the ra te prevalent on the last day of the accounting year, the depreciation amounted to Rs. 9,21,890.
6. The ITO reopened the assessments for the three years we are now concerned with, since he was of the view that the assessee had been given excessive relief by way of depreciation. After reopening he reduced the depreciation to Rs. 5,64,333 for the assessment year. This led to a reduction in the business loss by Rs. 3,57,557. The reduction effected for the assessment year 1972-73 was Rs. 2,04,791 and for the assessment year 1973-74 was Rs. 1,56,604.
7. The assessee took up the matter in appeal. Although the reopening of the assessment was contested, the Commissioner (Appeals) found that the reopening was proper. With regard to merits, he held that depreciation in terms of Section 32 of the Income-tax Act, 1961 ('the Act') has to be allowed only in terms of Indian rupees. According to him, if depreciation is to be calculated at the current rate of exchange after devaluation of the Indian rupee, then depreciation allowable would total more than the cost of the ship. This could not be the intention of the Legislature. He, therefore, felt that the ITO was correct in holding that the depreciation had to be worked out by applying the old exchange rate prevailing at the time when the ship was acquired.
8. Against this finding, the assessee has now come on further appeal.
Shri S.E. Dastur, for the company, submitted relying on certain decisions of the Tribunal that the computation of depreciation initially should be only in foreign currency only. He then pointed out that the purpose of depreciation is that at the end of the period the entire cost should be recouped. This purpose would be defeated if depreciation is given in Indian rupees at the rates prevalent after devaluation. Shri Akhilesh Prasad, appearing for the department, submitted that depreciation has to be given only in terms of Indian rupees and that would be a constant factor. According to him, the ITO's method was the correct method.
9. We have considered the facts of the case. The first point we have to decide before we take up the issue involved is the method by which the ITO has computed the income. Obviously, there is no question of the books of account being the basis for the computation of income. The books of account by itself would not show what was the income earned in India. That has to be only a fraction of the world income. Now, Rule 10 of the Income-tax Rules, 1962 ('the rules') states how the income in cases of non-residents could be determined. This rule gives three alternatives which are given below: (i) at such precentage 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.
In the first alternative, the ITO would have fixed a particular percentage which is reasonable and applied it to the total turnover. We have given in the earlier paragraphs the method in arriving at the Indian income. This method does not appear to be in conformity with the first alternative.
10. The second alternative is to find out the proportion of the Indian receipts to the total receipts and determine the profits therefrom. It appears to us that the ITO has adopted the second method. The assessee has given accounts of the total earnings from each voyage per ship.
They have also given the freight earnings from the Indian ports and have arrived at a proportion which the Indian earnings bear to the total earnings. This is exactly what the second alternative visualizes.
The fact that each voyage has been taken separately and the proportion determined is only a step taken in order to arrive at the final proportion. So, we will give a finding that the ITO has adopted the second alternative.
11. Now, once the ITO has adopted the second alternative, the question is whether it is open for him to go behind the depreciation fixed by the assessee in their books of account and recalculate it. Now, the rule says that the profits and gains should be computed in accordance with the provisions of the Act. It does not say that such computation should be in terms of Indian rupees. It is equally possible to do the computation in any foreign currency in which the books of account are maintained. The Act only provides for certain additions and disallowances. These additions and disallowances could be made irrespective of the currency in which the accounts are reflected.
Therefore, when it comes to a question of depreciation, it is not necessary that the cost of the ship should first be converted into Indian rupees at the rate prevailing on the acquisition of the ships and peg the depreciation to such cost in terms of Indian rupees so arrived at. If the ITO does that, he would not be arriving at the proportion the total profit bears to the Indian profits. That would be varied. The rule, in our opinion, does not permit the ITO to vary the allowances which the assessee is entitled to in determining the total profits accruing to it in the business.
12. In this connection, we will refer to the decision of the Calcutta High Court in the case of CIT v. Ellerman Lines Ltd.  75 ITR 47.
In that decision, a reference is made to a circular issued by the then CBR which is reproduced at page 52. For the sake of convenience, we extract the same below: The Board has decided that the instructions which appeared in paragraphs 112 and 113 of the Income-tax Manual (7th edition) and which have been substantially reproduced at pages 348-350 (excepting the last two paragraphs at page 350) of the Income-tax Manual (8th edition) should be followed in respect of the assessments of foreign shipping companies from 1940-41 onwards. These instructions, inter alia, allow a foreign shipping company furnishing annual accounts for the whole of its business, Indian and foreign, to adopt the U.K. wear and tear allowance for the purpose of the computation of its income in accordance with the second method provided by rule 33, and also allow a British shipping company to elect to be assessed on the basis of a ratio certificate granted by the U.K. authorities regarding the income or loss and the wear and tear allowance.
It will be seen from the above that under these instructions it will be clear that in respect of foreign shipping companies the ITOs have been directed to adopt the UK wear and tear allowance for the purpose of computing the income under rule 33 of the Rules. Under these instructions which, in our opinion, to continue to be binding on the ITO and under Rule 10 which is corresponding to rule 33, the wear and tear allowances should be corresponding to the wear and tear allowance given in the assessment in the country of origin. It is well settled that wear and tear allowance is another name given to depreciation.
From the above, obviously, whatever has been allowed to the shipping companies in foreign countries should be allowed in India also. It would appear to us, therefore, that the allowance primarily has to be in the currency in which the foreign company would be assessable abroad. So, in our opinion, these instructions prohibit the ITO to tinker with the basic figures on which wear and tear allowance has to be granted.
13. It may be of interest to note that the Supreme Court also gave their interpretation of this very same circular when the matter came on appeal before them. This is Ellerman Lines Ltd. v. CIT  82 ITR 913 (SC). It may be remembered that the above instruction was given in 1942. At that time there was no development rebate at all in the statute. The appeal before the Supreme Court was in respect of the assessment years 1960-61 and 1961-62. The company claimed that development rebate is also to be allowed under the same circular. This submission was accepted by the Supreme Court. The Supreme Court has pointed out that under rule 33 the power vested on the ITO is a very wide power. That power is available to the ITO as well as the appellate authorities. While adopting the basis given in the Rules, the ITO is not expected to rigidly apply the various conditions prescribed in the Act in the matter of granting one or the other permissible allowances.
He may adopt any equitable basis so long as that does not conflict with the Board's directions. Now, the only equitable basis we could think of is the basis in which the assessee would get full depreciation of the cost of the ships in the course of the period of 20 years. If the ITO's method is adopted, this equitable basis will stand defeated. In fact, this is one of the arguments of Shri Dastur for acceptance of the company's objections to the reassessment.
14. The Calcutta High Court has once again considered whether the circular we have referred to earlier can be considered for any assessment covered under the Act. This was the case of CIT v. Swedish East Asia Co. Ltd.  127 ITR 148 (Cal.). The facts of the case incidentally are identical with the facts of the case before us as far as the computation of the income is concerned. Each voyage is taken separately and the fraction referable to the Indian earnings is determined as in this case. The Tribunal had found that the second alternative in Rule 10 had been applied by the ITO. This finding was approved by the High Court. Therefore, our earlier finding that the second alternative has been applied is now based on authority. This is only an incidental observation. The High Court therein was concerned with the question whether a ship could be allowed depreciation even after it had completed the period of 20 years. The High Court held that the assessee was entitled to such depreciation insofar as the company had not been assessed to income-tax in respect of the income from that ship for a period of 20 years. It was the department's contention that the circular we have referred to would not allow any depreciation to be allowed for a period beyond 20 years. The High Court pointed out that the circular insofar as it is against clear statutory provisions in the Act will not be binding and will have to be discarded. The assessee will have to be granted depreciation so long as the statutory provisions are complied. Thus, the circular is applicable for any assessment made under the Act also.
15. We may approach the problem from another angle. Although depreciation is to be based on the actual cost to the assessee, that actual cost has to be determined in every assessment year. This is laid down by the Bombay High Court in CIT v. Bassein Electric Supply Co.
Ltd.  118 ITR 884. After noting the authorities on this point, their Lordships held: ...The actual cost determined for a particular asset can be altered or redetermined for a particular assessment year .... Each year's income-tax assessment is self-contained....
16. So, for the assessment years 1971-72 to 1973-74, it is incumbent on the ITO to redetermine the actual cost. Now, what he has to determine is the actual cost of the assets to the assessee. We place particular emphasis on the expression 'to the assessee'. What is required to be determined is what the assessee had to pay. Now, this determination is as pointed out above, for each assessment year separately. For each assessment year, the ITO must ask what did the assets cost to the assessee for this assessment year Not, what did the assets cost to the assessee in the year he acquired it. When he asked the question, the answer is, say, in respect of straat clarance f. 14.72 million.
Even for the assessment year 1971-72, it remains at f. 14.72 million, but, since the assessment finallv has to be in terms of Indian currency, the actual cost to the assessee, redetermined for the year 1971-72, would be the rupees equivalent off. 14.72 million at the exchange rate applicable in 1971-72. So, the assessee has a right that his cost should be redetermined for each year and when the assessee has acquired in terms of a foreign currency, the redetermination naturally would be by applying the exchange rate relevant to the assessment year concerned.
17. The above proposition does not lay down a ratio that whenever an asset is acquired by payment in foreign currency, the cost of the asset to the assessee must be redetermined every year with reference to the exchange rate. What we lay down here would apply only where the accounting is also done in foreign currency. That would invariably mean only non-residents whose Indian income has to be computed by applying Rule 10.
18. The provisions of Section 43(6) of the Act does not require anything inconsistent with the assessee's plea. That is because of the nature of the asset. They are ships and there is no requirement in the rules that depreciation should be on the written down value. Ships are depreciated at actual costs to the assessee on straight line method.
Perhaps, different considerations might prevail in the case of an asset, where the written down value has to be ascertained. We are not concerned with them in this appeal.
19. There is yet another angle to this question. That is the application of the provisions of Rule 115 of the rules. The rule is reproduced below: The rate of exchange for the calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be received by him or on his behalf in foreign currency shall be the telegraphic transfer buying rate of such currency as on the specified date.
Now, this rule postulates that the rate of exchange has to be applied only after determining the 'income accruing or arising to the assessee in foreign currency.' The exchange rate is to be considered only after the income has been determined. The 'income' necessarily means income as defined in Section 2(24) of the Act. That can be arrived at after allowing for all deductions permissible under the Act. This includes deduction by way of depreciation under Section 32. So, the application of the rule i.e., conversion of foreign currency to Indian rupee, would bs the last step. Therefore, the determination of the depreciation has to be only in terms of foreign currency only, that being a step in the process of determining the income.
20. For these reasons, we hold that the assessee is entitled to the depreciation claimed and allowed in the original assessments. The additions in the reassessments are deleted. The appeals are allowed.