SANKAR PRASAD MITRA J. - This is a reference under section 66(1) of the Indian Income-tax Act, 1922. The assessment years are 1952-53 to 1956-57, the corresponding accounting years being the calendar years 1951 to 1955. The assessee is the Netherlands Steam Navigation Co. Ltd. It is a non-resident company having business connections all over the world. It has a branch in Calcutta for its Indian business. It carried on business in the accounting years in question. It filed returns for each of the assessments concerned showing its taxable income computed on the basis of its annual accounts for its Indian trade, that is, for round voyages round the world but no particulars of the shipping trade were furnished.
The Income-tax Officer computed the taxable business income for each year by employing the following formula :
Indian trade profits x
Indian port receipts
Total port receipts.
By Indian trade profits is meant the profits of round voyages in which Indian ports were touched by the vessels. It was agreed between the department and the assessee that this was the correct method of assessment. In so computing the profits in India in each year, the Income-tax Officer allowed depreciation admissible under the Indian Income-tax Act and the relevant Rules made thereunder. He did not, however, allow initial or additional depreciation in respect of some ships in any of the years on the finding that those ships were newly acquired by the assessee in the accounting yeas, prior to those in which they were brought for trading in Indian waters and were not, therefore, entitled to initial or additional depreciation. The Income-tax Officer computed the taxable profits by applying rule 33 of the Income-tax Rules. In other words, the Income-tax Officer held that the assessee was entitled to initial depreciation and development rebate only on those ships which were entirely new and which were first brought into use in the Indian trade. The Income-tax Officer was of the view that as none of the concerned ships had been brought into use in the Indian trade in any of the years when they were new, the assessee was not entitled to its claim. With regard to additional depreciation, the Income-tax Officer held that the new ships should have been brought into use after the 31st March, 1948, so far as Indian shores were concerned. As one of them were new to the Indian trade in these years, additional depreciation was not admissible. The Appellate Assistant Commissioner, an appeal, confirmed these orders.
In the appeal to the Appellate Tribunal the assessee contended that the dispute related to the following ships brought into use variously :
(1) S. S. Bintang
Brought into use in 1950.
Brought into use in Indian trade in 1951.
Claim for the assessment years, 1952-53 to 1954-55.
(2) S. S. Billiton
Brought into use in 1951.
Brought into use in Indian trade in 1952.
Claim for the assessment years, 1953-54 to 1956-57.
(3) S. S. Banka
Brought into use in 1953.
Brought into use in Indian trade in 1954.
Claim for the assessment years, 1955-56 and 1956-57.
(4) S. S. Bawean
The assessees counsel also conceded that there was liability to tax; that rule 33 of the Indian Income-tax Rules was applicable; and that the second part of that rule, which reads as follows, must be applied :
'.... On an amount which bears the same proportion to the total profits of the business of such person (such profits being computed in accordance with the provisions of the Indian Income-tax Act), as the receipts so accruing or arising bear to the total receipts of the business, or in such other manner as the Income-tax Officer may deem suitable,'
The assessees counsel further contended that depreciation was granted under rule 8, which listed different rules to be allowed for different kinds of assets and that ships appeared under the same category as other such assets. The department agreed up to that point, but it stated that depreciation had to be considered in calculating the world profits only according to the provisions of the Indian Income-tax Act. The department contended further that once this was done and profits arrived at as per the second part of rule 33, the assessee was entitled to no more depreciation than that granted.
The Tribunal has held that in fact the steamers were brought into use after the 31st March, 1948, the relevant date for the allowances of depreciation claimed by the assessee. The Tribunal has also held upon reading rule 8 that ships like other assets were entitled to additional depreciation. Further, it held that as a shipping company was entitled to get additional depreciation for a continuous period of five years and the fact that in the first of these years the new steamers, about which there was no dispute, did not call at the Indian ports in one year or the next, would not disentitle the assessee to this benefit not only for that year but also for succeeding years.
On these facts the following question of law arises :
Whether, on the facts and circumstances of the case, the assessee company is entitled to additional depreciation in respect of the four ships mentioned above ?'
In the argument before us learned counsel for the department did not dispute that ships were entitled to additional depreciation under section 10(2)(via). We, therefore, proceed on the assumption that ships can be taken into consideration for the purposes of clause (via) of section 10(2).
Mr. Debi Pal, learned counsel for the assessee, in refuting the contention of the Income-tax Officer, has submitted to us that in this case no distinction can be made between the Indian trade and the rest of the trade of the assessee. The assessee carries on a shipping business. It was also carrying on business in India. It cannot be said that each of its ships was carrying on a separate business. In the premises, the whole question is whether these four ships have been installed in the shipping business of the assessee and they satisfy the conditions laid down in clause (via) of section 10(2). These conditions, according to Mr. Debi Pal, are;
(1) The subject-matter, building, machinery or plant should be new;
(2) the building, machinery or plant should have been installed after the 31st March, 1948;
(3) the benefit of depreciation allowed would enure for five successive assessments for the financial years next following the previous year in which it was erected or installed; and
(4) this period of five years shall fall within the period commencing on the first day of April, 1949, and ending on the 31st day of March, 1959.
Mr. Debi Pal urges before us that each of these conditions is applicable to the four ships mentioned above and as such the Tribunals in the instant reference should be upheld by this court.
It would be useful at this stage to quote the relevant portions of section 10 of the Indian Income-tax Act, 1922. These provisions are :
'10. Business. - (1) The tax shall be payable by the assessee under the head profits and gains of business... in respect of the profits or gains of any business..... carried on by him;
(2) Such profits or gains shall be computed after making the following allowances, namely :-...
(iv) in respect of insurance against risk of damage or destruction of buildings, machinery, plant, furniture, stocks, used for the purposes of the business,.... the amount of any premium paid;...
(vi) in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent (where the assets are ships other than ships ordinarily plying on inland waters), to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed (and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed);.....
(via) in respect of depreciation of buildings newly erected, or of machinery or plant being new which has been installed after the 31st day of March, 1948, a further sum (which shall be deductible determining the written down value) equal to the amount admissible in clause (vi) (exclusive of the extra allowance for double or multiple shift working of the machinery or the first year of erection of the buildings or the installation of the machinery or plant) (in not more than five successive assessments for the financial years next following the previous year in which such buildings are erected and such machinery and plant installed and falling within the period commencing of the first day of April, 1949, and ending on the 31st day of March, 1959);...'
In our view, in constructing clause (via) of section 10(2), the following principles should be borne in mind for the purpose of the present reference :
(1) Section 10(2)(via) confers a relief on the assessee. It should, therefore, be strictly construed. The assessee must establish that his case falls within the terms of the clause.
(2) Both section 10(2)(vi) and section 10(2)(via) grant depreciation allowances in respect of buildings, machinery or plant which are used for the purpose of the business, the profits whereof are taken into consideration for assessment under the Indian Income-tax Act.
(3) So far as section 10(2)(via) is concerned, it must be established that the plant or machinery in respect whereof the allowance is claimed was installed as a new asset for the first time for that business the profits of which are assessed under the Indian Income-tax Act.
(4) It will not be sufficient if the plant or machinery be introduced as a new asset into another business the profits of which are not being assessed under the Indian Income-tax Act and subsequently introduced into a business the profits whereof are assessed under the said act.
(5) Unless the plant or machinery satisfies the conditions of being new when introduced for the first time into the business the profits whereof are assessed under the Income-tax Act, the benefit of section 10(2)(via) cannot be granted at all.
(6) The period of five successive years will be allowed only if the conditions of section 10(2)(via) are satisfied in the very first year in which the claim is made.
We have come to the above conclusions not only upon going through the language used in clauses (iv), (vi), and (via) of section 10(2) but also by reason of the fact that section 10(1) provides for tax being payable in respect of the profits of any business carried on by the assessee and sub-section (2) provides for allowances to be given with regard to those profits. In other words, the profits of that business which is charged to tax under sub-section (1) can only be given allowances under sub-section (2). And clause (via) is a part of sub-section (2).
From the statement of the case we find that the assessees counsel conceded that rule 33 of the Income-tax Rules was applicable to the assessee. The relevant portion of the rule necessary for the purpose of the present reference which relates to computation of income liable to tax has been quoted in the statement of the case. For the sake of convenience we may once again quote the said portion here. It runs thus :
'.... On an amount which bears the same proportion to the total profits of the business of such person (such profits being computed in accordance with the provisions of the Indian Income-tax Act), as the receipts so accruing or arising bear to the total receipts of the business, or in such other manner as the Income-tax Officer may deem suitable.'
It appears that the income of a non-resident like the assessee in the instant case that is chargeable to Indian Income-tax is to be computed in the manner following :
Receipts accruing in India x Net world profit
Total world receipts
In the statement of the case we are told that no particulars were ever furnished by the assessee of its shipping trade. An agreed basis of computation of the assessees income for levying Indian Income-tax was, therefore, arrived at. In accordance with this agreed basis the Income assessable to Indian income-tax was ascertained by the following formula :
Receipts actually accruing in India x Net profits of Indian trade.
Total receipts for Indian trade
(actually accruing - accruing from round voyages).
The position, therefore, is that the present assessees income for Indian income-tax purposes was never computed upon taking into consideration either its net world profits or its world receipts. Learned counsel for the Commissioner frankly told us that if the department for computing the Indian income of the assessee in terms of rule 33 had considered the net world profit and the total world receipts, the assessee would have been entitled to claim depreciation under clause (via) with respect to the four new ships being the subject-matter of this reference. But since that procedure was never adopted it is failure on the part of the assessee to claim this depreciation inasmuch as the earnings of these new ships never came into the picture in the assessment of the respondent under the Indian Income-tax Act.
In our opinion, no relief in any shape or form can be enjoyed by any assessee under the Indian Income-tax Act in respect of a source of income unless the income from that source is taken into consideration for the purpose of that Act. In the reference before us the income in question was outside the purview of the assessment under the Indian Income-tax Act. And, in the circumstances, we have to hold that the assessee was not entitled to any relief under clause (via) of section 10(2).
Before we close we ought to two decisions relief on by Mr. Debi Pal on behalf of the respondent. He first drew out attention to the judgment of the supreme court in Commissioner of Income-tax v. Indo Mercantile Bank Ltd. in this case in an assessment to income-tax under the Travancore Income-tax Act of the profits and gains of a business carried on by an assessee in the State of Travancore as well as the State of Cochin, it has been held that the assessee entitled to set off the losses incurred in the State of Cochin against the profits made in the State of Travancore. The Supreme Court has said that section 10 of the Indian Income-tax Act, 1922, does not distinguish between the business in British India and business in an Indian State or so divide business. On this basis Mr. Debi Pal argued that the respondent in this reference cannot be said to have been carrying on an Indian trade and a world trade. This dichotomy is not permissible under the Indian Income-tax Act, and therefore, the depreciation claimed by the assessee should have been allowed. It should be remembered that the Supreme Court in Indo-Mercantile Banks case was dealing with the case of a resident. A resident under section 4(1)(b) is subjected to tax in respect of income in the taxable territories. The problem that arises before us did not come up for consideration by the learned judges of the supreme court.
The next case of Mr. Debi Pal is the judgment of the Madras High Court in Veerappa Transports v. Commissioner of Income-tax It has been stated in this case that if the plant or machinery is new and would be eligible for allowance in terms of section 10(2)(via), the fact that during the period of five years or the prescribed period under section 10(2)(via), there is a transfer of the business as such together with the newly acquired plant or machinery to another, by act or parties or by operation of law, would not defeat the claim for the allowance.
Relying on this decision, learned counsel for the respondent argues before us that simply because the depreciation was not claimed in the very first year, it does not mean that a claim made in any of the subsequent years within the period prescribed in clause (via) must fail.
We are of the view that this case does not support the argument of Mr. Debi Pal. We respectfully accept the principles enunciated by the Madras High Court. The facts were that a business which was being carried on by the father and his sons as members of a Hindu undivided family was transferred to a partnership consisting of some persons. At page 445 the Madras High Court says :
It is not disputed that these vehicles purchased brand new after the 31st March, 1948, that the additional depreciation was granted to the quondam Hindu undivided family and that the claim of the assessee-firm is not beyond the outer limit of 31st March, 1959.'
Then at page 446 it is stated :
The scheme of depreciation allowance enacted under section 10(2)(vi) and 10(2)(via) of the Indian Income-tax Act does not compel us to hold that an assessee who succeeds to a business should be deemed to have started the business afresh and should not be deemed to continue the existing business. In our opinion, what is really important is the business which is certainly the income-yielding asset and which is the source from which the taxable income is determined and not the assessee who actually becomes subject to the payment of tax.' In other words, the view that we have taken, namely, that the eligibility to claim depreciation must arise in the very first year of acquisition of the asset is not at all affected by this decision of the Madras High Court.
In the present case, in the years the new ships were acquired, the assessee-company did not claim any depreciation. Its claim for depreciation under clause (via) was made when the income arising from those ships were taken into account by the Indian Income-tax authorities, but during the years the claims were being advanced, the ships were not new but had already become old.
Having regard to the principles discussed in this judgment we are unable to sustain the order of the Appellate Tribunal. The answer to the question referred to us is in the negative.
The respondent will pay to the applicant the costs of this reference.
SEN J. - I agree.
Question answered in the negative.