# ELLERMAN LINES LTD v. C.I.T. WEST BENGAL, CALCUTTA

- **Citation:** [1972] 2 S.C.R. 168
- **Court:** Supreme Court of India
- **Decided:** 1971-10-22
- **Bench:** K. S. Hegde, N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/ellerman-lines-ltd-v-c-i-t-west-bengal-calcutta-5510
- **Pages:** 9

## Headnote

Income-tax Act, 1922, ss. 5(8), 10(2) (vib)-lndian Income-tax Ru/es,
1922, r. 33-Non-resident shippin11 company-Computation of turnoverRatio certificate issued by U.K. Chief Inspector of Taxes mentioning in·
vestn1ent ollowance granted by U.K. authorities-In assessing Indian in--
co1ne nf non-resident whether such investn1en-1 allowance (corresponding
to deve/op111e111 rebate under India Act) whether to be taken into consideration-Effect of circular bv Central Board of Revenue.
Under a circular issued in 1962 by the Central Board of Revenue under
s. 5(8) of the Indian Income-tax Act, 1922 the assessing authorities were
directed to permit British Shipping Companies to elect to be ass"sed on
the basis of a ratio certificate granted by the U.K. authorities regarding the
income or loss and the wear and tear allowance. In 1964 the Board instructed the taxing autho'rities to take into consideration the investment
allowance granted by U.K. authorities in computing the taxable income of
the British Shipping companies. The appellant was a non'resident British
Shipping company whose ships plied all over the world including Indian
waters. For the years 1960-61 and 1961-62 the Income-tax Officer computed its total iricome under the Indian Income-tax Act, 1922 by taking
into account the ratio certificates issued by the Chief Inspector of Taxes
U.K. which were based on the assessments made on the appellant in U.K.
In making assessment the Income-tax Officer purported to proceed on the
basis of r. 33 of the Indian Income-tax Rules, 1922.
One of the points
considered by the Income-tax Officer and the Appellate Assistant Commissiuner \\'a'i \\'hcther the investment allowance was to be taken into account
in assessing the Indian income.
Both of them rejected the contention of
the appellant that it should be taken into account.
The tribunal decided
in favour of the appellant but the High Court in rderence took the opposite view.
In appeal to this Court by special leave.
HELD : (i I The authorjties under the Act proceeded on the !Y.isis that
the ·computati9n of the income of the assessee had to be made on the
second of the three bases mentioned in r. 33.
Admittedly the profits of
the ac;sesscc were not computed in accordance with the provisions of the
Act.
That being so. the second basis mentioned in r. 33 could not be
applied.
This aspect was brought to the notice of the High Court. But
the High Court refused to consider the same on the ground that both the
Revenue as well as the assessee had proceed
1ed before the authorities uoder
the Act on the assumption that the seoond basis mentioned in r. 33 was the
relevant basis. The High Court erred in adopting this approach. The fact
that the authorities under the· Act as \\'ell as the .:>arties were under a mistaken impression could not alter the true position in law.
[!74 H-175
Bl
(ii) The computation of appellant"s income had to be made either
under the first basis viz. the calculation of the profits and gains on such
percentage of the turnover accruing or arising as the Income-tax Officer
may consider to be reasonable, or on the third basis i.e. 'in such other
manner as the Income-tax Officer may deem suitable'. [175 CJ
A
B
c
D
E
F
G
A
B
c
D
E
F
G
H
ELLERMAN LINES LTD. v. C.I.T. (Hegde, J.)
169
From the assessment orders it did not appear that the first basis was
adopied. The most appropriate basis under which the income could have
been computed was the last basis viz. "in such other manner as the lncometax Officer may deem suitable". While adopting that bas.is the Income-tax
Officer is not required to rigidly apply the various cond11Ions prescribed 1n
the Act in the matter of granting one or the other o!
the permtsStble
allowances. He may adopt any equitable basis as long as .the basts does
not conflict either with r. 33 or with the instructions or directions given
by the Board of Revenue. The power given t~ the Income-tax Officer on
that basis is a 'very wide power. That power 1s aYatlable not o

## Text

168
ELLERMAN LINES LTD.
v.
C.I.T. WEST BENGAL, CALCUTTA
October 22, 1971
[K. S. HEGDE AND A, N. GROVER, JJ.]
Income-tax Act, 1922, ss. 5(8), 10(2) (vib)-lndian Income-tax Ru/es,
1922, r. 33-Non-resident shippin11 company-Computation of turnoverRatio certificate issued by U.K. Chief Inspector of Taxes mentioning in·
vestn1ent ollowance granted by U.K. authorities-In assessing Indian in--
co1ne nf non-resident whether such investn1en-1 allowance (corresponding
to deve/op111e111 rebate under India Act) whether to be taken into consideration-Effect of circular bv Central Board of Revenue.
Under a circular issued in 1962 by the Central Board of Revenue under
s. 5(8) of the Indian Income-tax Act, 1922 the assessing authorities were
directed to permit British Shipping Companies to elect to be ass"sed on
the basis of a ratio certificate granted by the U.K. authorities regarding the
income or loss and the wear and tear allowance. In 1964 the Board instructed the taxing autho'rities to take into consideration the investment
allowance granted by U.K. authorities in computing the taxable income of
the British Shipping companies. The appellant was a non'resident British
Shipping company whose ships plied all over the world including Indian
waters. For the years 1960-61 and 1961-62 the Income-tax Officer computed its total iricome under the Indian Income-tax Act, 1922 by taking
into account the ratio certificates issued by the Chief Inspector of Taxes
U.K. which were based on the assessments made on the appellant in U.K.
In making assessment the Income-tax Officer purported to proceed on the
basis of r. 33 of the Indian Income-tax Rules, 1922.
One of the points
considered by the Income-tax Officer and the Appellate Assistant Commissiuner \\'a'i \\'hcther the investment allowance was to be taken into account
in assessing the Indian income.
Both of them rejected the contention of
the appellant that it should be taken into account.
The tribunal decided
in favour of the appellant but the High Court in rderence took the opposite view.
In appeal to this Court by special leave.
HELD : (i I The authorjties under the Act proceeded on the !Y.isis that
the ·computati9n of the income of the assessee had to be made on the
second of the three bases mentioned in r. 33.
Admittedly the profits of
the ac;sesscc were not computed in accordance with the provisions of the
Act.
That being so. the second basis mentioned in r. 33 could not be
applied.
This aspect was brought to the notice of the High Court. But
the High Court refused to consider the same on the ground that both the
Revenue as well as the assessee had proceed
1ed before the authorities uoder
the Act on the assumption that the seoond basis mentioned in r. 33 was the
relevant basis. The High Court erred in adopting this approach. The fact
that the authorities under the· Act as \\'ell as the .:>arties were under a mistaken impression could not alter the true position in law.
[!74 H-175
Bl
(ii) The computation of appellant"s income had to be made either
under the first basis viz. the calculation of the profits and gains on such
percentage of the turnover accruing or arising as the Income-tax Officer
may consider to be reasonable, or on the third basis i.e. 'in such other
manner as the Income-tax Officer may deem suitable'. [175 CJ
A
B
c
D
E
F
G
A
B
c
D
E
F
G
H
ELLERMAN LINES LTD. v. C.I.T. (Hegde, J.)
169
From the assessment orders it did not appear that the first basis was
adopied. The most appropriate basis under which the income could have
been computed was the last basis viz. "in such other manner as the lncometax Officer may deem suitable". While adopting that bas.is the Income-tax
Officer is not required to rigidly apply the various cond11Ions prescribed 1n
the Act in the matter of granting one or the other o!
the permtsStble
allowances. He may adopt any equitable basis as long as .the basts does
not conflict either with r. 33 or with the instructions or directions given
by the Board of Revenue. The power given t~ the Income-tax Officer on
that basis is a 'very wide power. That power 1s aYatlable not only to the
Income-tax Officer but also to the Appellate Assistant Commissioner and
the Tribunal.
[175 D-F]
As the Tribunal had determined the tax due from the appellant on the
ha.is of the ratio certificate given by the U.K. authorities, it could not be
said that the decision reached by the Tribunal was an unreasonable one.
The Tribunal"s decision was in accord with the instructions of the Board
of Revenue.
[175 FJ
Tub fact that the proviso to s. 10(2) (vib) was incorporated into the
Act after the Board issued its instructions could not affect either the vali•
dity of r. 33 or the force of the instructions issued by the Board of Revenue
because ncithor r. 33 nor the instructions issued by the Board were strictly
in accordance with s. 10(2). [175 G-H]
Navnit Lal C. Javeri
v. K. K. Sen, Appellate Asstt. Commissioner,
Bombay, 56 I.T.R. 198, applied.
CIVIL APPELLATE JuRismcnoN :
Civil Appeals No;, 2459
and 2460 of 1968 and 1161 and 1162 of 1971.
Appeals by certificate/special leave from the judgment and
order dated April 1, 1968 of the Calcutta High Court in In~ome
tax Reference No. 163 of 1964.
N. A. Palkhiva/a, T. A. Ramachandran and D. N. Gupta, for
the appellant (in all the appeals).
Jagadish Swarup, Solicitor-General, B. B. Ahuja, R. N. Sachthey and B. D. Sharma, for the respondent (in all the appeals).
The Judgment of the Court was delivered by
Hegde, J.
The first two appeals have been brought by certificate and the other two by special leave.
The .Jater two appeals
came to be fi!ed because the certificates on the basis of which the
earlier appeals were brought, were found to be defective inasmuch
as t~e High Court had not given any reason in support of those
certificates.
Hence it is sufficient, if we deal with the later two
appeals .
. The appellant is a non-resident British Shipping Co. whose
ships ply m waters all over the world including the Indian waters.
For the. assessment years 1960-61, and 1961-62 (the relevant
accounting years being calendar years 1959 and 1960). the In·
come-tax Officer computed its total income taxable under the
12-L 256 Sup Cl/72
170
SUPREME COURT REPORTS
(1972] 2 S.C.R.
Indian Income-tax Act, 1922 (which will hereinafter be referred
to as the Act) by taking into account the ratio certificates issued
by the Chief Inspector of Taxes, U.K. which were based on the
assessments made on the appellant in U.K.
During the relevant
period, there was in U.K. "investment allowance" corresponding
to "development rebate" under the Act.
The certificates issued
by the Chief Inspector contained the percentage ratio of the total
world profits of the appellant to its world earnings and similarly
the percentage ratio of the wear and tear allowance and the investment allowance to its total world earnings.
In making the ass<!Ssment, the Income-tax Officer purported to proceed on the basis
of rule 33 of the Indian Income-tax Rules 1922. The said rule
reaas:
"In any case in which the Income-tax Officer is oC
opinion that the actual amount of the income, profits
or gains accruing or arising to any person residing out
of the taxable territories whether directly or indirectly
through or from any business connection in the taxable
territories, or through or from any property in the taxable territories or through or from any assets or source
of income in the taxable territoriei, or through or
from any money lent at interest and brought into the taxable territories in cash or in 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-tax Officer may consider to be reasonable,
or 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 receipt of the business, or in such other manner as the Income-tax Officer
may deem suitable."
The Income-tax Officer proceeded to assei9 the appellantassessee on the second of the three bases mentioned in rule 3 3;
but in computing Indian eamings, he did not include the destination earnings received in India i.e. freight received in Indian
ports in respect of cargo loaded at non-Indian ports nor did he
take into account the investment allowance granted to the appellant in its U.K. assessments.
Aggrieved by the order of the Income-tax Officer, the assessee
took up the matter in appeal to the Appellate Assistant Commissioner.
The Appellate Assistant Com.missioner accepted the
contention of the assessee as regards the inclusion of the destiA
B
c
D
E
F
G
H
A
B
D
E
F
G
H
ELLERMAN LINES LTD. v. C.I.T. (l!.egde, J.l
171
nation earnings in the computation of the Indian eannings of the
assessee but rejected its cootention as regards the investment allowance.
Aggrieved by the order of the Appellate Assistant Commissioner both the assessee as well as the Revenue appealed to
the Income-tax Appellate Tribunal.
The Tribunal allowed the
appeal of the assessee and dismissed that of the Revenue. Thereafter at the instance of the Revenue, the following two questions of law were referred to the High Court under s. 66 (1) of
the Act.
"1. Whether, on the facts and in the circumstances
of the case, the Tribunal was right in holding that the
destination earnings collected in India should be considered as part of the Indian earnings in determining
the assessee's Indian income under Rule 33 of the Income-tax Rules ?
Whether, on the facts and in the circumstances of
the case, the Tribunal was right in allowing the claim of
the assessee for the investment
allowance under the
U.K. Act (corresponding to the development rebate
under the Indian Income-tax Act, 1922) in the computation of its total world income for the purpose of determining the assessee's Indian income under rule 33 of
the Income-tax Rules, 1922 ?"
The High Court answered the first question in favour of the
assessee and the second in favour of the Revenue. Hence these
appeals by the assessee. The Revenue has not appealed against
the decision of the High Court as regards Question No. 1. Hence
we have only to consider whether the decision of the High Court
relating to Question No. 2 is in accordance with law.
At the commencement of his
arguments Mr.
Palkhivala,
learned Counsel for the assessee indicated that rule 33 may not
be applicable to the facts of the case; but he said that for the purpose of this ca,')e, he was prepared to proceed on the basis that
the said rule is the governing provision. The authorities under
the Act as well as the High Court have examined the facts of
this case on the basis of rule 33. The second question referred
to the High Court requires the High Court to express its opinion
whether on the facts and in the circumstances of the case, the
Tribunal was right in al!owing the claim of the assessee for the
investment allowance under the U.K. Act in the computation of
the total world income for the purpose of determining the assessee's Indian income under rule 33. Under these circumstances,
it would not be appropriate for us at this stage to ignor!l the
~
earlier proceedings and examine the case afresh on a wholly diffe-
172
SUPREME COURT REPORTS
[1972] 2 S.C.R.
rent basis.
Hence we have not gone into the question whether
rule 33 is applicable to the facts of the case. We are proceeding
on the assumption that it applies.
An mentioned earlier, the assessee is a non-resident. Its liability to pay tax arises under ss. 3 and 4 of 1he Act. The total
income that arose or accrued or deemed to have arisen or accrued
to it in this country in the relevant previous years is liable to be
taxed in this country. Section 10(2) provides for certain allowances to be deoucted while computing the taxable income.
Section 10(2) (vib) deals with the development rebate. The material
part of that section reads:
"bl respect of a new ship acquired or new machinery or plant installed after the 31st day of March, ~954
which is wholly used for the purposes of the busmess
carried on by the assessee, a sum by way of development rebate in respect of the year of acquisition of the
ship or of the installation of the machinery or plant,
equivalent to,-
( i) in the case of a ship acquired after the 31st day
of December, 1957, forty pl'r cent :lf the actual
cost of the ship to assessee, and
(ii) in the case of a ship acquired before the 1st
day of January, 1958 aind in the case of any
machinery or plant, twenty-five per cent. of the
actual cost of the ship or machinery or plant
to the asses see."
The proviso to that dause says :
"Provided that no allowance under this clause shall
be made unless-
(a) the particulars
p~scribed for the purpose of
clause (vi) have been furnished by the assessce
in respect of the ship or machinery or plant;
and
(b) except where the assessee is a company being a
Jice>nsee within the meaning of the Electricity
(Supply) Act; 1948 ( 54 of 1948), or where
the ship has been acquired or the machinery or
plant has been installed before the 1st day of
January, 1948 an amount equal to seventy-five
per cent
of the
development rebate
to be
actually allowed is debited to the profit and loss
account of the relevant previous year and credited to a reserve account to be utilised by him
A
B
c
D
E
F
G
H
A
B
c
D
F
G
H
ELLERMAN LINES LTD. v. C.I.T. (Hegde, J.)
173
during a period of ten years next following for
the purposes of the business of the undertaking
except-
(i) for distribution by way of dividends or profits, or
(ii) for remittance outside India as profits or
for the creatiQ!l of any asset outside India,
and if any such ship, machinery, or plant is sold
or otherwise transferred by the assessee to any
person other than the Government at any time
before the expiry of. ten years from the eind of
the year in which it was acquired or installed,
any allowance made under this clause shall be
deemed to have been wrongly allowed for the
purposes of this Act."
It may be noted that in the case of a shipping company like
the appellaint before us, whose ships ply all over the world, it
may not be possible to strictly comply with· the provisions contained in s. 4 of s. 10(2). The proyisions dealing with the levy
of Income-tax are not identical in all countries. lt may well nigh
be impossible for a shipping. company like the appellant to
rigidly comply with the requirements of the laws in force in the
numerous countries where it can be said to have earned income.
Possibly to get over such a difficulty rule 33 was enacted. That
is how the Revenue had proceeded in assessing the appellant.
Evidently in exercise of its power under s. 5(8) of the Act,
which says that "all officers and persons employed in the execution o.f this Act shall observe and follow the orders, instructions and directions of the Cr.ntral Board of Revenue .... ", the
Central Board of Revenue had issued the notification dated February 10, 1942.
Under that notification instructions had been
issued to the assessing authorities laying down the principles to
be applied in assessing the foreign shipping companies.
As regards the British Shipping Companies, they were directed to permit those companies "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".
At the time that n'.Jtification was issued the Act did not
provide for a development rebate.
Therefore that notification
d0es not refer to any development rebate.
But it is made clear
by that notification that a British Shipping Company can elect to
be assessed on the basis of a ratio certificate granted by the U.K.
authorities regarding the income or loss which means the net
income or net loss.
During the relevant previous years, tbe Act
174
SUPREME COURT REPORTS
(1972 J 2 S.C.R.
provided for deduction of the development rebate in the computation of the taxable income.
During those years the U .K.
Income-tax Act provided for a similar allowance; but that allowance was known as investment allowance.
We were informed
at the bar that in those years, the percentage of devlopment
rebate allowed under the Act was the same as that allowed under
the U.K. law as investment allowance.
In about the beginning of 1964 M/s. Turner Morrison & Co.
which was the agent of several British Shipping Companies in
India appears to have written to the Board of Revenue seeking
its advice as to how the British Shipping Companies could claim
development rebate.
In reply to that letter, the Board of Revenue wrote to them as follows :
"Sub : Assessment of British Shipping Companies on the
basis of ratio certificates--Treatment of investment
allowance granted in the U.K.
I am directed to reply your letter dated 8th Feb.
1957 on the above subject and to state that as the development rebate which corresponds to the investment
allowance granted in the U.K. is allowed under the Indian Income-tax Act from the assessment year 1956-57,
there is no objection to allow the investment allowances
for the purpose of the computation of the Indian Income
of British Shipping Companies.
This would, however
be subject. to the condition that. the investment allowance
would be permitted as a deduction only to the extent
to which the rate of the allowance granted in the U.K.
is not greater than the rate of development rebate allowed under the Indian Income-tax Act."
We were informed that the copies of that Jetter were sent to
the II' . )IT,e-tax Commissioners in the va:ious States.
From this
letter, it i> clear that the Board of Revenue had instructed the
taxing authorities to take into consideration the investment allowance granted by the U.K. authorities in computing the taxable
income of the British Shipping Companies. At this stage, it is
necessary to mention that the proviso to cl. (vib) of s. 10(2)
referred to e:irlier was incorporated into the Act sometime after
the above instructions were issued by the Board of Revenue.
The authorities under the Act have proceeded on the basis
that the computation of the income of the assessee has to be made
on the second of the three bases mentioned in rule 33.
This
assumption appears to be incorrect.
Admittedly the profits of
the assessee company were not computed in accordance with the
provisions of the Act.
TI!at being so, the second basis mentioned
D
E
F
G
H
A
B
c
D
E
F
G
H
ELLERMAN LINES LTD. v. c.I.T. (Hegde, /.)
175
in rule 33 cannot be applied.
This aspect was brought to the
notice of the High Court. But the High Court refused to consider the same on the ground that both the Revenue as well as
the assessee had proceeded before the authorities under the Act
o.n the assumption that the second basis mentioned in rule 33 is
~e relevant basis.
In our opinion the High Court erred in adoptmg that approach.
The fact that the authorities under the Act
as well as the parties were under a mistaken impression cannot
alter the true position in law. It is obvious that that basis could
not have been applied.
That being so the computation of the
appe!Jant's income had to be made either under the first basis viz.
the calculation of the profits and gains on such percentage of the
t1:1rnover accruing or arising as the Income-tax Officer may consider to be reasonable or on the third basis i.e. 'in such other
manner as the Income-tax Officer may deem suitable'.
From the assessment orders made by the Income-tax Officer,
it does not appear that in computing the taxable income of the
assessee, he adopted the first basis.
The most appropriate basis
under which he could have computed the income was the last
basis viz. "in such other manner as the Income-tax Officer may
deem suitable." While adopt)ng that basis, the Income-tax Officer is not required to rigidly apply the various conditions prescribed in the Act in the< matter of granting one or the other of the
permissible allowances.
He may adopt any equitable basis so
long as that basis does not conflict either with rule .: 3 or with
the instructions or directions given by the Board of Re\ e1me. The
power given to the Income-tax Officer under that basis is a very
wide power.
That power is available not only to the Income-tax
Officer but also to the Appellate Assistant Commissioner and the
Tribunal.
As the Tribunal had determined the tax due from
the appellant on the basis of the ratio certificate given by the U.K.
authorities, it cannot be said that the decision reached by 1he
Tribunal was an unreasonable one.
The Tribunal's decision accords with the instructions given by the Board of Revenue.
The fact that the proviso to s. I 0 ( 2) ( vib) was incorporated
into the Act after the Board issued its instructions cannot affect
either the validity of rule 33 or the force of the instructions issued
by the Board of Revenue because neither rule 3 3 nor the instructions issued were strictly in accordance with s. 10 (2).
They
merely lay down certain just a,nd fair methods of approach to a
difficult problem.
The learned Solicitor-General appearing for the Revenue at
one stage of his arguments contended that the instructions issued
1'76
. SUPREME COURT REPORTS
[1972] 2 S.C.R .
by the Board of Reven!!e cannot hav7 any bindin.g. effect and those
instructions cannot abrogate or modify the prov1S1ons of the Act.
But he did not contend that rule 3 3 is ultra vires the Act.
~he
instructions in question merely lay down the manner of applymg
rule 33.
Now coming to the questio!li as to the effect of instructions
issued under s. 5(8) of. the Act, this Court observed in Navnit
Lal C. Javeri v. K. K. Sen,, Appellate Asstt. Commissioner Bombay: (1)
"It is clear that· a circular of the kind which was issued by the Board would be binding on all officers and
persons employe4 in the execution of the Act under
section 5(8) of the Ac~. This circular pointed out to all
the officers that it was likely that some of the companies
might have advanced loans to their share-holders 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 provison."
The directions given in that circular clearly deviated from the
provisions of the Act, yet this Court held that tlie circular was
binding on the Income-tax Office~.
For the reasons mentioned above, Civil Appeals Nos. 1161
and 1162 of 1971 are allowed and in substitution of the answer
given by t'.ic High Court to question No. 2, we answer that question in th, affirmative and in favour of the assessee.
The assessee
is entitled to its costs in those appeals both in this Court as well
as in the High Court-costs one set.
Civil Appeals Nos. 2459
and 2460 of 1968 are dismissed as being nat maintainable.
In
those appeals, there will be no order as to costs.
G.C.
C.A.s Nos. 1161 and 1162/71 allowed.
C.A.s Nos. 2459 and 2460/68 dismissed.
{I) 56 l.T.R. 198.
A
B
c
0
E