# [1970] 1 S.C.R. 1

- **Citation:** [1970] 1 S.C.R. 1
- **Court:** Supreme Court of India
- **Decided:** 1969-03-14
- **Case number:** Civil Appeals Nos. 1622 to 1626 of 1968
- **Bench:** J. C. Shah, V. R.Amaswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1970-1-s-c-r-1-4727
- **Pages:** 8

## Headnote

Income-tax Act 1922 section 10(2) (vi-a)-Non-resident-Company
-Taxable profits computed by special formula
evolved by Income-tax
Officer and not under second method in rule 33
Income.tax Rules of
1922-Whether initial and additional depreciation admissible.
The appellant is a non-resident shipping oompal\Y with its local office
in. Calcutta.
For its assessment to income-tax for the yea:rs 1952-53 to
1956-57 the appellant filed returns disclosing taxable income computed on
the basis of its annual turn-over in its Indian trade but did not furnish
particulars of its world income.
The Income-tax Officer computed the
taxable busine&s income for each year by application of a special formula
which was accepted by the appellant. However, in computing the income,
the Income-tax Officer only allowed n.ormal depreciation and other trade
allowances admissible under the Income-tax Act 1922 and did not allow
any initial depreciation or additional depreciation. in respect of the ships
of the appellant in any of the assessment years, because the ships acquired
by the, appellant were not introduced into the Indian business in the years
in which they were newly acquired. 1'he orders of assessment were confirmed by the Appellate Assistant Commissioner but the Tribunal
held
that in respect of all the four ships, additional depreciation was admissible
under section 10(2) (vi-a) of the Act, as claimed. The High Court, on a
re.ference, answered the question against the assessee.,
HELD : Additional depreciation was not admiss;ble to the appellant as
an allowance in the computation df the taxable inl!ome by the
special
formula adopted by the Income-tax Offi.oer.
It was common ground that the appropriate method for determining
the pr.:ifits was the second methqd in r. 33.
But that method was never
apphed; if it was applied in the computation of the world profits of the
assessee, it would have been necessary to allow the various depreciation
allowances.
The assessee could not, while accepting
determination of
taxable profits in a manner not warranted by the se.cQild method under
r. 33, claim that additional depreciation should be allowed, [8 E]
. . T~e . Supreme Court in the present appeal was exercising an advisory
1unsd1ction and could not decide whether the computation of taxable income
by the IncomMax Officer by the application of the formula evolved by
him was correct.
Additional de.preciation is a statutory allowance in the
determin.ation of taxable profit under S. 10 of the Act and in the case of
a non-resident 'Where, actual income cannot be deter~ined. and resort is
had to r. 33, not when. an empirical method is adopted for computation
of the taxable income. [7 HI
·

## Text

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NETHERLANDS STEAM NAVIGATION COMPANY LTD.
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v.
THE COMMISSIONER OF INCOME-TAX, WEST BENGAL
March 14, 1969
[J. C. SHAH AND V. R.AMASWAMI, JJ.J
Income-tax Act 1922 section 10(2) (vi-a)-Non-resident-Company
-Taxable profits computed by special formula
evolved by Income-tax
Officer and not under second method in rule 33
Income.tax Rules of
1922-Whether initial and additional depreciation admissible.
The appellant is a non-resident shipping oompal\Y with its local office
in. Calcutta.
For its assessment to income-tax for the yea:rs 1952-53 to
1956-57 the appellant filed returns disclosing taxable income computed on
the basis of its annual turn-over in its Indian trade but did not furnish
particulars of its world income.
The Income-tax Officer computed the
taxable busine&s income for each year by application of a special formula
which was accepted by the appellant. However, in computing the income,
the Income-tax Officer only allowed n.ormal depreciation and other trade
allowances admissible under the Income-tax Act 1922 and did not allow
any initial depreciation or additional depreciation. in respect of the ships
of the appellant in any of the assessment years, because the ships acquired
by the, appellant were not introduced into the Indian business in the years
in which they were newly acquired. 1'he orders of assessment were confirmed by the Appellate Assistant Commissioner but the Tribunal
held
that in respect of all the four ships, additional depreciation was admissible
under section 10(2) (vi-a) of the Act, as claimed. The High Court, on a
re.ference, answered the question against the assessee.,
HELD : Additional depreciation was not admiss;ble to the appellant as
an allowance in the computation df the taxable inl!ome by the
special
formula adopted by the Income-tax Offi.oer.
It was common ground that the appropriate method for determining
the pr.:ifits was the second methqd in r. 33.
But that method was never
apphed; if it was applied in the computation of the world profits of the
assessee, it would have been necessary to allow the various depreciation
allowances.
The assessee could not, while accepting
determination of
taxable profits in a manner not warranted by the se.cQild method under
r. 33, claim that additional depreciation should be allowed, [8 E]
. . T~e . Supreme Court in the present appeal was exercising an advisory
1unsd1ction and could not decide whether the computation of taxable income
by the IncomMax Officer by the application of the formula evolved by
him was correct.
Additional de.preciation is a statutory allowance in the
determin.ation of taxable profit under S. 10 of the Act and in the case of
a non-resident 'Where, actual income cannot be deter~ined. and resort is
had to r. 33, not when. an empirical method is adopted for computation
of the taxable income. [7 HI
·
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1622
to 1626 of 1968.
Appeals from the judgment and order dated February 11, 1964
of the Calcutta High Court in Income-tax Reference No. 100
1960.
{
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2
SUPREME COURT REPORTS
[1970] I S.C.R.
Sachin Chaudhuri, T. A. Ramachandran and D. N. Gupta, for
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the appellant (in all the appeals).
S. T. Desai, S. A. L. Narayan Rao, R.H. Dhebar, R. N. Sachthey and B. D. Sharma, for the respondent (in al! the appeals).
The Judgment of the Court was delivered by
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Shah, J. Netherlands Steam Navigation Company Ltd.-
hereinafter called "the assessee"-is a non-resident Company engaged in shipping business. For the. assessment years 1952-53 to
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1956·57 the assessee filed its return of income for the relevant
accounting years disclosing taxable income computed <ln the basis
of its annual turnover in its Indian trade i.e. "round voyages" to
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and from Indian Ports. The assessee did not furnish particulars
of its world income. The Income-tax Officer computed the taxable business income of the assessee for each year hy the application of the following formula ;
Indian trade profits X Indi:in Port receipts
Total Port receipts
By the expression "Indian trade profits" in the formula was meant
profit earned in "round voyages" made by the assessee's ships which
touched Indian ports. Operation of the formula may be illustrated
by taking a sample computation by the Income-tax Officer for the
year 1953-54 :
~·T vt'll gros~ earnings in Indi<'..n Trade
Deduct:-
(1) Total expenses in Indi1n Trade , -
(2) Depreciation aUowance
Net Profit India Trade
Gress earnings from Indian Ports
Proportionate Indian Profits5,440,042
-----x 1,585,851
10,024,996 .
Kr.
7,705,474
733,671
Kr.
10,024,996
s,43;,145
1,585,851
5,440,042
860,559
(Rs. lOO~Kr. 79 ·80)
Rs. 10,78.395"
In computing the profits of the assessee in India in each yeai:
the Income-tax Officer allowed norma!"depreciation and other trade
allowances admissible under the Indian Income-tax Act, 1922,
and the relevant rules made thereunder. He, however, did net
allow initial depreciation and additional d\'preciation in respect
of the ships of the assessee in any of the assessment years, because the ships acquired by the assessee were not introduced into
the Indian business in the years in which they were newly acquired.
The orders of assessment were confirmed by the Appellate Assistant Commissioner.
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NETHERLANDS STEAM CO. V. C.l.T. (Shah, J,)
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In appeal to the Income-tax Appellate. Tribunal ~he assessee
claimed additional depreciation for four ships for which the following details were furnished :
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"(!) S. S. Bintang ..
(2) S. S, Billiton
(3) S. S. Bonka
(4) S.S. B:iwean
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B1·ought into use in 1950..
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Hruugbt into use in the Indian trade 111 19)1,
Cl<.itn for the <.ssessment years 1952-53 to
1954-55.
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Brought into use in 1951.
Brvught ir1to use in the Indian tr<:.de in 1952.
Cl<-in1 for the <·.ssessment years 1953-54 to
1956-57.
Brought into use in 1953.
Brought into use in the Indinn trade in l 954.
Claim fl)r lhe <~sses!-.ment ye<:;rs
1955-56 ;_nd
1956-57.
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Brought into use in 1953.
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Brought into use in the Indian trade 1n 195.f.
Claim for the :~ssessment years 1955-56 and
1956-57."
The assessee and the Commissioner were agreed that the taxable
income of the assessee had to be determined by the application
of the second method in Rule 33 of the Indian Income-tax Rules,
1922.
The Tribunal also observed that the Commissioner and
the assessee agreed that the formula adopted by the Income-tax
Officer was "the correct method of assessment''.
The Commissioner submitted before the Tribunal that if the
Indian business of the assessee be regarded as part of its world
business and not independent of'it, the world profits of the assessee
must be computed ,;ccording to the provisions of the Indian Income-tax Act, 1922, and additional depredation may be taken
into account in determining the taxable profits under the Indian
Income-tax Act as a fraction of the world profits. But he maintained that if the Indian trade be regarded as a separate business
and not part of the world trade of the assessee, additional depreciation could only be allowed under s. 10(2)(vi-a) of the Indian
Income-tax Act, provided ships which are new are in<roduced into
the Indian trade and not otherwise.
In the opinion of the Tribunal, in computing the· taxable income of the assessee under the Indian Income-tax Act, 1922, the
Indian business must be taken to be part of the assessee's world
business, and "depreciation which the assessee was entitled to, in
respect of its world business by the application of the Indian
Income-tax Act would be proportionately available in respect of
its Indian business." The Tribunal observed that under r. 33 "the
profits have to be calculated uuder the terms of the Indian Incometax Act and this act postulated that on all machinery, plants and
such other things like steamers brought into business after March
31, 1948, additional depreciation must also be granted".
The
SUPREME COURT REPORTS
[1970] 1 S.C.R.
Tribunal then observed that the ships brought into the Indian trade
were not new in the years of account relevant to the five years
of assessment, but the assessee was still qualified under s. 10(2)
(vi-a) to additional depreciation for a continuous period of five
years, and "the fact in the first of these years the new ships did
not call at the Indian Ports in one assessment year did not disentitle the assessee to the benefit not only for that year but also
for· the succeeding four years".
Accordingly the Tribunal held
that in respect of all the four ships of the assessee, additional depreciation was admissible as claimed.
At the instance of the Commissioner of Income-tax, the following question was referred by the Tribunal to the High Court
of Calcutta for opinion in respect of each of the five years :
"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 ?"
The High Court answered the question in the negative.
Clause (vi-a) was inserted in s. I 0(2) of the Indian Income-tax
Act, I 922, by s. 11 of the Taxation Laws (Extension to Merged
States and Amendment) Act 67 of 1949. The clause as amended
by s. 8 of the Indian Income-taX (Amendment) Act 25 of 1953
with effect from April I, 1952, reads as follows :
"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 in determining the
written down value) equal
to the amount admissible
under clause (vi) (exclusive of the extra allowance for
double or multiple shift working of the machiiiery or
plant and the initial depreciation allowance admissible
under that clause for the first year of erection of the
building or the installation of the machinery or plant)
in not more than five succes5ive assessments for the
financial years next following the previous year in whlch
such buildings are erected and such machinery and plant
installed and falling within the period commencing on
the !st day of April, 1949, and ending on the 31st
day of March, 1959."
The asscssee is a non-resident Company. It maintains a Branch
Office in Calcutta; but on that account the Indian business of
the assessee cannot be regarded as business distinct from its world
business. It was not so treated by the Income-tax Officer, or by
the Appellate Assi~tant Commissioner.
In computing profits or
gains of business carried on by an assessee, normal depreciation
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NETHERLANDS STEAM CO. V. C.I.T. (Shah, J.)
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under s. 10(2)(vi) and additional depreciation under 5. 10(2)(vi-a) ·
are undoubtedly admissible in the conditions and to the extent
allowed under the two clauses.
By s. 4(1) of the Indian Inc.ome-t~ Act, the ~<ital income of
any previous year of a non-resident .mcludes. all mcome, profits
and gains from whatever source denved wh1ch-
(l) are received or are deemed to be received in the taxable territories in such year by or on behalf of such
person, and
(2) which accrue or arise or are deemed to accrue or arise
to him in the taxable territories during such-year.
Section I 0 of the Act which charges to tax the profits and gains
of business, profession or vocation carried on by an assessee applies to
assessees
who
are residents, residents. but
n~t
ordinarily resident, and non-residents. Profits and gams of business of a non-resident received or deemed to be received in the
taxable territories by or on behalf of the assessee are taxable under
the Indian Income Tax Act 1922 : profits and gains of business
which accrue or arise or are deemed to accrue or arise to him
in the taxable territories are also taxable under that Act; liut
profits and gains which accrue or arise or are deemed to accrue
or arise to a non-resident without the taxable territories are not
taxable under the Act.
Section 4 is one of the pivotal sections· in the scheme of the
Income-tax Act. Thereby within the total income of a non-resident is included income received, arising or accruing, or deemed
to be received, or to have a~isen or accrued, -within the taxable
territories. The Act however gives no clear guidance for determining when income may be sa(d to have arisen or. accrued within the taxable territories. But r. 33 framed under tlie Act purports
to give some direction to the Income-tax Officer for determining
income, profits or gains accruing or arising to a non-resident for
the purpose of assessment to income-tax. There is no dispute that
the profits of the business taxable under the Indian Income-tax
Act, 1922, are a fraction of the world-profits-and the profits
are to be determined under r. 33 of the Income-tax Rules. Rule
3 3 of the Income-tax Rules reads as follows :
"In any case in which the Income-tax Officer is of
opinion that the actual amount of the income, profits
or gain~ accruing or arising to any person residing out
of the taxable territories whether directly or indirectly
thr~ug~ or from any business connection iI). the taxable
territones or through or from any property in the taxable
territories, or through or from any asset or source of
income in the taxable territories, or through or from any
6
SUPREME COUJ.T REPORTS
[1970] 1 s c.R.
money lent at interest and brought into the taxable territories in cash or : n kind cannot be ascertained, the
amount of such income, profits or gains for the purposes
of assessment to income-tax may be calculated on such
percentage of the turnover so accruing or arising as the
Income-tall Officer may consider to be reasonable, or
on an amount which bears the same proportion to the
total profits ol the business of such person (such profits
being computed in accordance with the provisions of
the Indian Income-tall Act) as the receipts so accruing
or arising bear to the total receipts ~f the business, or
in such other manner as the Income-tall Officer may
deem suitable."
The rule authorises the Income-tall Officer to adopt one of the
three methods of determining income, profits or gains For the
purpose of assessment to income-tu where the Income-tax Officer
is unable to ascertain the actual amount of income, profits or
gains, arising inter-a/ia out of a business connection in the tax·
able territories :-(a) a percentage of turnover considered reasonable (b) a proportion of the total profits (computed according
to the provisions of the Indian Income Tax Act) of the business
of the assessee equal to the proportion which the receipts accntjng •.
or arising bear to the total receipts of the business and (c) such
other manner as the Income-tu Officer may deem suitable.
The second method, it was ~ommon ground, was properly
applicable to the determination of taxable income of the assessee.
That method requires as a first step. determination of the total
profits of the business of the assessee in accordance with the pro·
visions of the Indian Income-tall Act : the next step is to determine the proportion between the receipts accruing or arising
within the taxable territories and the total receipts of the business;
and the third step is to determine the income. !Jrofits or gains
by the application of the proportion for the purpose of assessment
to income-tax. This method ordains that the fraction which the
total profits bear to the total world receipts is to be applied to the
Indian receipts for determining the taxable profits.
The income
so determined will be the taxable income without any further allowances, because the permissible allowance will all enter the
computation of the world income and income taxable under the
Income-tax Act is also a fraction thereof.
Apparently the Income-tax Officer did not apply the second
method under r. 33 in computing the tallable income of the
asscssee, for under that method in determining the taxable income
the receipts accrued or arising in India had to be multiplied by
the proportion between the total profits of the business and the
total receipts of the world business.
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NETHERLANDS STEAM CO. v. C.I.T. (Shah, J.)
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Counsel for the assessee asked us to assume that the profits
computed by the Income-tax Officer according to the fo~ula
adopted by him are profits determined by. the second meth~ ~ r.
33, and claimed on that footing that beside normal ~epreciat1on,
additional depreciation ought also to have been taken mto account,
and the taxable profits of the assessee determined on th~t basis.
But that assumption cannot be made. One of the. essential. con·
ditions of the applicability of the second method_ m r. 33 1s the
determination of the total world profits of tl).e assessee under tee
Indian Income-tax Act, and reduction of the Indian taxable profits by the application of the appropriate fraction. The_ assessee
has not produced its books of account of its world trade to enable
the Income-tax Officer to determine its total taxable profits arising
from its world business.
There was apparently no clear appreciation of the true im·
port of the second method under r. 3 3 before the Departmental
Authorities and the Tribunal. Counsel for the assessee suggested
that his client may be willing to produce before the Income-tax
Officer the books of account of the relevant years for computing
the total world profits according to the Indian Income-tax Act,
1922, and the benefit of additional depreciation may then be
allowed to the assessee in computing the total profits under the
Indian Income-tax Act. Counsel for the Commissioner expressed
his willingness to the adoption of that course. Counsel requested
us to adjourn the hearing to enable them to obtruri instructions
from their respective clients, and the hearing was accordingly adjourned for three weeks. But ultimately counsel for the assessee
informed us that his clients may not be able to bring before the
Income-tax Officer the books of account of their world trade.
The Income-tax Officer has evolved a special formula for determining the profits which is not the second method in r. 33 of
the Income-tax Rules.
The asse•oee has not challenged tbe correctness of that method, nor has the Department. In the application of , that formula, normal depreciation and trade expenses are
deducted from the total gross earning in the Indian trade, but not
the additional depreciation.
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Clearly the Income-tax Officer did not in computing the taxable income resort to the second method in r. 33 or the Incomet~x Rules. We are exercising in these appeals advisory jurisdiction, and are only called upon to answer the question referred by
the Tribunal. We are incompetent to decide whether computation of the taxable income by the Income-tax Officer by the application of the formula evolved by him is correct: that question is
not before us.
We are only concerned to detemine the validity
of the claim for admitting additional depreciation in the computation of the taxable income of the assessee by the method adopted
8
SUPREME COURT REPORTS
(1970) 1 S.C.R.
by the Jacome-tax Officer.
Additional depreciation is a statutory allowance in the determination of taxable profit under s. 10
of the Act, and in the case of a non-resident where actual income cannot be determined, and resort is had to r. 33, not
when an empirical method is adopted for computation of the taxable income ..
We arc however unable to agree with the observations of the
High Court that "no relief in any shape or form can be enjoyed
by any asscssee 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
assessment under the Indian Income-tax Act".
That was not
the plea of the Commissioner. The source of the income of the
assessee charged to tax was business: it was not income from any
other source. The Commissioner and the assessee were ad idem
on that matter. The only dispute was whether additional depreciation was admissible in the computation of the taxable income,
when the taxable business profits were determined by the Incometax Officer by the method evolved by him.
It was common ground that the appropriate method for determining the profits was the second method in r. 33.
But that
method was never applied : if it was applied in the computation
of the world profits of the assessee, it would have been n~ary
to allow the various depreciation-allowances. The assessee could
not, while accepting determination of taxable profits in a manner
not warranted by the second method under r. 33, claim that additional depreciation should be allowed. The answer to the guestion
therefore is that additional depreciation is not admissible as an
allowance in the computation of the taxable income by the special
formula adopted by the Income-tax Offi=.
The appeals fail.
The assessee will pay the costs of these
appeals.
One hearing fee.
R.K.P.S.
Appeals dismissed.
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