1971 PLP 429 (PTD)

QADEERUDDIN AHMAD, C. J.‑This reference has been made by the Income‑tax Appellate 'tribunal, Karachi Bench, Karachi, on an application made to it by the Commissioner of Income‑tax. The question proposed by the Commissioner has been referred to us and it is as follows: "Whether on the facts and in the circumstances of the case, the Tribunal was correct in holding that initial depreciation and additional depreciation can b: allowed under section 10(2) (vi) and rule 8(2) (now rule 9) of the Income‑tax Rules in case of ships registered outside Pakistan and not installed in Pakistan and which did not ply in Pakistan for the first time ?"

2. In order to explain the purport of the above reference we may state that the respondent‑company, namely, M/s. Shaennihon Steamship Co. Ltd., which is a foreign company, was assessed to income‑tax at Karachi. The relevant assessment year was 1956‑57 and the relevant accounting year had ended on the 30th of September 1955. The company had shown a loss of Rs. 11,181: but the Income‑tax Officer did not accept this figure as correct and reduced it to Rs.

853. The reason was that the Income‑tax Officer declined to allow initial and additional depreciation to the company. The assessment order is of 7 prin ted lines only and its relevant part is as follows: "The loss worked out on rule 33 basis comes to Rs. 855 only after the exclusion of the initial and additional depreciations on ships not installed for the first time in the waters of Pakistan and as such not entitled to these depreciations." The company went in appeal to the Appellate Assistant Commis sioner of Income‑tax, who accepted it for the following reasons: "Separate accounts are not maintained for branches (by foreign companies). The income in Pakistan is accordingly computed with reference to the total net profits in the ratio of world shipping earnings. (in terms of section 10 (2) (vi) of the Income‑tax Act, 1922). The world income is computed after taking into account the earnings of the ships owned by the appellant‑company. The world income so arrived at is accordingly apportioned on the basis of freight receipts in each part. 1n working out the total net profit all expenses under the Pakistan Income‑tax Act are to be allowed including claim on account of depreciation, as admissible under the rules. As the Pakistan income is worked out on pro rata basis, the appellant's claim on account of depreciation both initial and additional, cannot be ignored while computing the total world profit."

3. Since the above decision was against the Income‑tax Department, the Department went in appeal to the Income‑tax Appellate Tribunal, Karachi Bench, who dismissed it. The rele vant observations are as under : "The Departmental Representative argued that the ships in respect of which the initial and a additional depreciation was claimed were as a matter of fact never used in Pakistan and even under Rule 33 the depreciation has to be calculated according to the rules laid down by the Pakistan Income‑tax Act. Since these rules do not permit the allowance of any initial and additional depreciation in respect of the assets not installed for the first time in Pakistan, the respondent is not entitled to these allowances. The respondent's representative, however, brought to my notice circular instructions contained in the Central Board of Revenue's C. No. 27 (13)‑ITP/53, dated 16th April 1955 whereby clear directions have been issued that the initial and additional depreciation under section 10 (2) (vi) and rule 8 (2) should by allowed in the case of plant and machinery installed outside the taxable territories. Moreover, I find that the matter has been clinched by the decision of the Tribunal vide their orders in I. T. A. No. 1099, 1100 and B. P. T. A. No. 89 of 1958‑59 decided on 26th July 1963 (on 26‑7‑1960)."

4. A perusal of the orders made by the Income‑tax Officer, the Appellate Assistant Commissioner and the Income‑tax Appel late Tribunal shows that the relevant provisions are rule 33 (now rule 40) of the Income‑tax Rules of 1922 and section 10 (2) (vi) of Income‑tax Act, 1922 and rule 8 (2) of the Income‑tax Rules of 1922. They were applied because the assessee was a foreign company and carried on the business of plying ships in the seas of the world including the waters of Pakistan. In a case like this it is difficult to assess the profit, if any, which is made by such a company in Pakistan; therefore, subsection (3) of section 42 of the Income‑tax Act, 1922, was enacted. The subsection is as follows: "42(3). In the case of a business of which all the operations are not carried out in Pakistan the profits and gains of the business deemed under this section to accrue or arise in Pakistan shall be only such profits and gains as are reason ably attributable to that part of the operation carried out in Pakistan." This provision lays down the basic principle but does not embody the method of making calculations ; therefore, rule 33, which is now rule 40 of the Income‑tax Rules of 1922, was framed. The Rule is as under: "

33. In any case in which the Income‑tax officer is of 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 asset or source of income in the taxable territories, 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 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 will be noted that under this rule three methods of calculation are provided. One of them is that the Income‑tax Officer may follow such method of calculation as he may consider to be reasonable. The other is that income‑tax may be assessed on an amount of income, profits or gains which bears the same proportion to the world profits of the business of such an assessee as the receipts accruing or arising to him, within the taxable territories in this case, within Pakistan‑bear to the total receipts of the business provided that such income, profits or gains are computed according to the provisions of the Income tax Act, 1922 ; and the third method is that the Income‑tax officer may adopt such other course as he may consider suitable.

5. In this case the second method was adopted by the Income‑tax Officer who took into consideration the total world income of the company and then by taking into consideration the receipts of the company in Pakistan, found out the propor tion of such receipts to the total receipts in the world and declared the profits of the company in Pakistan to be an amount that represented the proportion of the receipts of the company in Pakistan. These calculations led to the conclusion that the company had suffered a loss of Rs. 853 only. The company claimed that it was further entitled to initial depreciation in terms of section 10 (2) (vi) of the Income‑tax Act, 1922 and additional depreciation in terms of rule 8(2) of the Income‑tax Rules, 1922, and thus had suffered a total loss of Rs. 11,181.

6. The Income‑tax Officer did not agree with the view that the loss of the company was bigger than Rs. 853 because he declined to give to the company the benefit of section 10 (2) (vi) and rule 8 (2). Those provisions of the relevant time were as follows: "Section 10 (2) (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 in 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 and where the buildings have been newly erected, or the machinery or plant not being motor vehicles not plying for hire or machinery or plant entitled to the development allowance under clause (vi‑a) and not having previously been used in Pakistan has been installed after the 31st day of March 1945, a further sum in respect of the year of erection or installation or the year in which such building, plant or machinery is used by the assessee for the first time for the purposes of his busi ness, profession, or vocation or the year in which commer cial production is commenced, whichever is the latter equivalent,‑ (a) In the case of buildings other than the buildings referred to in sub‑clause (aa) and sub‑clause (b) the erection of which is begun and completed between the 1st day of April 1946 and the thirtieth day of June 1965 (both dates inclusive), to fifteen percent. of the cost thereof to the assessee; (aa) in the case of residential buildings for industrial labour, the erection of which is begun and completed between the 1st day of April 1954 and the thirtieth day of June 1965, (both dates inclusive), to twenty‑five percent. of the cost thereof to the assessee; Explanation.‑The expression `residential buildings for indus trial labour' means buildings constructed for use as dwelling houses by workmen and other persons, employed on monthly wages not exceeding four hundred rupees, in an industrial undertaking following under any of the classes specified in clauses (a) to (e) of subsection (2) of section 15‑B; (b) in the case of other buildings, to 10 percent. of the cost thereof to the assessee, (c) in the case of machinery or plant other than ships or motor vehicles not plying for hire, to twenty‑five percent. of the cost thereof to the assessee; (d) in the case of ships, to forty percent. of the cost thereof to the assessee; Provided that‑ (a) the prescribed particulars have been duly furnished. (b) where, in the assessment of the assessee or, if the assessee is a registered firm, in the assessment of its partners; full effect cannot be given to any such allowance in any year not being a year which ended prior to the 1st day of April 1939 owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of clause (b) of the proviso to subsection (2) of section 24, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance, or, if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding years; and (c) the aggregate of all such allowances made under this Act or any Act repealed hereby. or under the Indian Income‑tax Act, 1886, shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant, or furniture, as the case may be. Rule 8 (2).‑In respect of plant and machinery (not having been previously used in Pakistan) installed on or after the first day of April 1948, and before the first day of April 1959, the allowance for each of the five previous years beginning with the year of installation shall be twice the amount of the allowance computed in accordance with sub‑rule (1)."

7. The substance of the controversy between the Department and the assessee is as to whether the assessee‑company is entitled to initial and additional depreciation in spite of the fact that none of its ships were for the first time installed in the waters of Pakistan. From this point of view the controversial part of the above‑mentioned two provisions is as follows: " . . not having previously been used in Pakistan has been installed." According to the Income‑tax Department, these words mean that depreciation could not be claimed unless the company had installed a ship in Pakistan which was not previously used in Pakistan. As against this, the contention of the company, which has been upheld by the Appellate Assistant Commissioner and the Income‑tax Appellate Tribunal is that depreciation could be allowed on those ships also which were installed any where in the world during the relevant year.

8. We have reproduced the discussion which is found in the orders of the Income‑tax Officer, the Appellate Assistant Commissioner and the Income‑tax Appellate Tribunal but feel that it is necessary to further analyse the situation for arriving at our own conclusion. Mr. S. A. Nusrat appearing on behalf of the Department has contended that originally the words were "being new has been installed." The concession was therefore, applicable to all new ships but not to those ships of the Pakistan Companies which were not new when they were acquired by them. The language was therefore amended in 1948 by substituting the words "being new" by the words "not having previously been used in Pakistan" with the result that the provi sion, as already mentioned, became as follows: "and not having previously been used, in Pakistan has been installed." The above words are intended to refer to a plant or machinery including a ship belonging to a company, which was not new but was not previously used in Pakistan. The idea was to give the benefit of initial and additional depreciation to the Pakistani Companies on plants, machinery or ships even if they were not new when acquired by Pakistani Companies, provided they were not previously used in Pakistan. This provision was indirectly applicable to foreign steamship companies also for purposes of determining the profit, if any, made by them in Pakistan and such determination included a decision about the admissibility or otherwise of initial and additional deprecia tion. The Central Board of Revenue understood the meaning of the provision to be that it was not necessary for a ship of a foreign company to be installed in Pakistan. On the basis of this view it issued a letter to M/s. Ferguson & Co. in reply to their reference about the admissibility of initial and additional depreciation allowance as follows: "With reference to your letter No. T. 1871, dated 26th February 1955, on the above subject I am directed to say that the Board have decided that initial and additional deprecia tion allowance under section 10 (2) (vi) of the Income‑tax Act, 1922 and rule 8 (2) of the Income‑tax Rules, 1922 should also be allowed in the case of plant and machinery (ship) installed outside the taxable territories, provided the condition laid down for their grant are fulfilled." That letter was issued in 1955 in pursuance of a decision which was taken by the Board of Revenue in 1953. ‑The view was followed by the Income‑tax Department though, we are told by counsel for the parties, that a different view was taken for the first time by an Income‑tax Officer in the case of Mughal Lines Ltd. It was, however, rejected by the Income‑tax Appel late Tribunal vide its order dated the 26th of July 1960. The Tribunal has referred to that order in this case. The Income tax Department did not question the decision of 1960 by asking for a reference to the High Court.

9. Thereafter, in the present case the Department has taken the same view which it had taken in Mughal Lines Ltd. and has on reference come to this Court for a decision.

10. There is no disagreement among counsel for the parties that the provisions of law contained in section 10 (2) (vi) of the Income‑tax Act, 1922 and rule 8(2) of the Income‑tax rules, 1922 are applicable to this case. The point of difference is a narrow one. Mr. Ali Athar, who represents the assessee, says that the meaning of the words" and not having previously been used in Pakistan has been installed" do not mean that a ship should have been for the first time installed in Pakistani waters because the expression "installed" is unqualified, whereas the opposite view which is pressed by Mr. S. A. Nusrat is that it is implicit in the language of the provision that the ship should have been for the first time installed in Pakistani waters. He has contended that the words "not having previously been used in Pakistan" occur before the words "has been installed", therefore, it was an unnecessary repetition to add the words "in Pakistan" after the words "has been installed".

11. Mr. Ali Athar's reply is that this contention cannot bold good because an amendment has actually been made in 1967 in which the so‑called redundant words have been added and since then the provision is as follows: "and not having been previously used in Pakistan has been installed in Pakistan." The fact that these words have been added, according to Mr. Ali Athar, is an indication of acknowledgment by the Legislature that the words did not convey the meaning which the newly added words have now given to the provision.

12. An amendment is often indicative of the intention of the Legislature to acknowledge an existing defect and to remove it by the amendment. In the words of Maxwell on Interpretation of Statutes "There is some presumption that statutes passed to amend the law are directed against defects which have come into notice about the time when those statutes passed." The presumption, however, does not necessarily arise in every case because sometimes amendments are made to clarify an intention which was existing from the beginning. There is no indication in the history of this law that the original intention of the Legislature was to limit the installation of ships in Pakistan. The first amendment which was made in 1948 was obviously intended to introduce the new idea of previous use a in Pakistan. At that time the words "has been installed" were existing and could not convey the meaning that installation was to be made in Pakistan. So much so that even after the amendment the Central Board of Revenue did not consider that amendment to imply that installation in Pakistan was necessary. This decision was made by it in 1953. The Department acted on that basis for about 17 years before the amendment introducing the words "in Pakistan" after the words "has been installed" was made in 1967.

13. Mr. S. A. Nusrat says that the decision which was made by the Board of Revenue in 1953 was withdrawn on the 27th of August 1961 and suggests that the Department had realised its error. The order by which the circular was with drawn is not before us, but Mr. S. A. Nusrat says that its contents do not disclose any such realisation. To our mind the withdrawal is not of much significance because the Income tax Department continued to act on that basis and did not challenge the view which was taken by the Income‑tax Appellate Tribunal when it made its decision on the 26th of July 1960 against the Department.

14. Lastly, we may add that Mr. Ali Athar has drawn our attention to the principle of law that where there is a doubt or ambiguity in the meaning of a fiscal provision, the inter pretation beneficial to the tax‑payer should be given to it. We are inclined to apply this principle to this case particularly because the situation has now, according to both counsel, been established beyond controversy after the amendment which was made in 1967. In support of the view that we are taking Mr. Ali Athar has drawn our attention to Netherlands Steam Navi gation Co. Ltd. v. Commissioner of Income‑tax, West Bengal ((1969) 74 I T R 72) which was decided by the Supreme Court of India. Counsel has requested us to refer to that judgment. The Indian law is not in all respects the same as ours but rule 33 is the same. In view of the judgment, the principle of law appears to be helpful to the foreign companies even if their ships are not for the, first time installed in the taxable territory provided that assessment is made according to the second method prescrib ed by rule 33 of the Income‑tax Rules, 1922.

15. In conclusion, our answer to the question is in the affirmative. Reference answered in the affirmative.