P L D 1985 Supreme Court 118 (PLP)

ZAFFAR HUSSAIN MIRZA, J.-In this appeal as well as in 45 other appeals, which were all heard together, a common question of law requires to be determined. As these appeals arise out separate judgments of the High Court and different sets of facts are involved in each separate appeal, it is proposed to dispose of the common question of law in this appeal and then decide each appeal separately in the light of the decision on the question-of law.

2. The facts giving rise to this appeal are that Messrs Shenniben Steamship Company Limited is a foreign shipping company which carries on business all around the world and was being assessed by the Incometax Department as a non-resident assessee on world income basis under rule 33 of the Income Tax Rules. The controversy in the present appeal pertains to assessment year 1956-57. For that year the assessee in its return claimed a net loss of Rs. 11,181 which was supported by trading account for the whole world business of the company (as separate accounts were not maintained for branches) and this loss was based on the ratio of Pakistan Frieght Receipts to the world freight receipts in the world loss. In computing the world loss itself the assessee-Company had taken into account depreciation, including initial and additional depreciation, in respect of new ships acquired. by the company. The Income-tax Officer determined the loss under rule 33 at Rs. 855 only, after excluding initial and additional depreciation on ships not installed for the first time in the waters of Pakistan and held the company not entitled to such depreciation.

3. The matter was brought in appeal before the Appellate Assistant Commissioner who, however, took the contrary view and came to the conclusion that the assessee-Company was entitled to both the initial and additional depreciation on the ships involved in producing the world income. This view was affirmed by the Income-tax Appellate Tribunal, which dismissed the appeal of the department. On the application of the Commissioner of Income-tax, the Tribunal referred the following question of law to the erstwhile High Court of Sind and Baluchisran, Karachi: "Whether on the facts and in the circumstances of the case, the Tribunal was correct in holding that initial depreciation and additional depreciation can be allowed under section 10(2) (iv) 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?"

4. The High Court upon consideration of the relevant legal provisions upheld the view that prevailed with the appellate Assistant Commissioner and the Income-tax Appellate Tribunal, and answered the question referred to it in the affirmative vide judgment dated 10-11-1970. The departmen then brought the matter before this Court and leave was granted to consider the proper interpretation of section 10(2) (vi) of the Income-tax Act, 1922, in regard to the words "not having previously been used in Pakistan has been installed", in order to determine the contention that these words mean "that the depreciation could not be claimed unless the company has installed the ship in Pakistan which was not previously used in Pakistan."

5. Now the profits and gains of business carried on by the assessee are assessable under section 10 of the Income-tax Act, 1922. Subsection (2) of section 10 provides expressly for certain allowances, so that the profits and gains of business are to be computed after making the relevant allowance or allowances as may be applicable. In the present case we are concerned with the depreciation allowance which is regulated by section 10(2) (vi) of the Income-tax Act, 1922, which at the relevant time read as under "In respect of the depreciation of such buildings, machinery, plant or furniture, being the property of the assessee, a sum equivalent, where the assets are ships ocher 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 for hire or machinery or plant entitled to the development allowance under clause (via.) 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 in which such building, plant or machinery is used by the assesssee for the first time for the purposes of his business, profession or vocation or the year in which commercial production is commenced, whichever is the later, equivalent, (a) . (aa) . (b) . (c) . (d) in the case of ships, to forty per cent of the cost thereof to the assessee.

6. Rule 8(2) of the Income-tax Rules provided for extra depreciation allowance on machinery and plant which was in the following terms; "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 flve previous years beginning with the year of installation shall be twice the amount of the allowance computed in accordance with sub-rule (i)." In this case, as observed by the High Court the question in controversy is as to whether the assessee-Company was entitled to the initial and additional depreciation under the aforesaid reproduced provisions of law, in spite of the fact that none of its ships were for the first time installed in the waters of Pakistan. It is in this context that the controversial words requiring interpretation occurring in the aforesaid two provisions are as under: "not having previously been used in Pakistan has been installed."

7. Since the respondent is a non-resident trading company, in accordance with section 4(c) of the Income-tax Act, 1922, only such income, profits and gains of the company were taxable as accrued or arose or were deemed to accrue or arise to them in Pakistan. In the case of non-resident persons it may sometimes be difficult to assess the profits, if any, which such person may make in Pakistan. Section 42(3) of the Income-tax Act, 1922 provides as under; "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 reasonably attributable to that part of the operation carried out in Pakistan." As to the method for determining or assessing the profits and gains of such a person which can be said to be reasonably attributable to that part of the operations car. fed out in Pakistan, rule 33 was framed in the Income tax Rules which may also be reproduced for convenience of understanding the controversy in this case, as under : "

33. In any case in which the Income-tax Officer is of the 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 asset or course of income in the taxable territories, or through or from any money lent at interest and brought into the taxable territories of such income profits or gains for the purposes of assessment to income-tax may be calculated on such percentage of the turn over 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 profits being computed in accordance with the provisions of the Income-ax 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." Out of the three methods of computation provided for in rule 33, the Income tax Officer in this case adopted the second method, namely, a proportion of the total profits (computed according to the provisions of the Income-tax Act) of the business of the assessee equal to the proportion which the receipts accruing or arising from the business of the assessee in the taxable territories in Pakistan, bear to the total receipts of the business. There is no dispute before us that the Income-tax Officer in the present case adopte the second method of calculation. In so doing the Income-tax Office had first to determine the total profits of the business of the assessee in accordance with the provisions of the Income-tax Act, 1922, secondly he was to determine a proportion between the receipts accruing or arising within the taxable territories in Pakistan and the total receipts of the business of the assessee, and lastly to determine the income, profits or gains of the assessee by application of the proportion of the receipts of the total world business. - It may here be observed that section 4(c), which deals with the chargeability of tax in the case of a non-resident, makes it permissible to determine the total income of any previous year for the purposes of assessing the tax, to include all income, profits and gains, which "are deemed to accrue or arise to him in Pakistan during such year." Clearly, therefore, 'in such a case the charge is levied not on the actual income accruing but which is supposed notionally to have accrued. In the case of shipping companies like the respondent before us, whose ships ply all around the world be difficult to strictly comply with the provisions contained i section 4 and section 10(2), for the obvious reason that the levy of income tax in different parts of the world is regulated by different laws. This appears to us to be the rationale for the enactment of rule

33. The second method of computation contained in rule 33, therefore, envisages the principle of notional determination of the income of the non-resident assessee accrued to him in Pakistan for the purpose of levy of the tax, by applying the ratio of the receipts of the Pakistan business against the receipts of the world, to profit or loss in the world business.

8. In view of the above analysis of rule 33 it is inherent in the mechanics of the second method of computation that the world income be subjected to all the provisions of the Income-tax Act, 1922, in order to determine the income, profits and gains of the assessee's business in Pakistan. The reason is not far to seek. The scheme underlying this method of computation assumes that the profits and gains of the business of the assessee attributable to his operations in Pakistan, is not severeable from his total world business as a whole, of which the Pakistan business is a part and parcel. Unless, therefore, .the world business of the assessee is brought under assessment by applying the provisions of the Income-tax Act, 1922, it will not be possible to determine the profits and gains of such part of the whole according to that method. The wording of rule 33 plainly shows that the profits of the world income of the assessee in such a case are to be computed in accordance with the provisions of the Income tax Act. It, therefore, follows that all the provisions of the Act including section 10(2) will be applicable and the allowances provided for will have to be made in computing the profits and gains of the world business. This is sufficient to dispose of the fundamental dispute in this case.

9. However, much argument was addressed on the crucial words occurring in section 10(2) and rule 8(2) with regard to the ships not previously used in Pakistan but "which have been installed", after the 31st March, 1945 for the purposes of depreciation allowance referred to in section 10 (2) (vi); and between 1st April, 1958 and 1st April, 1959, in respect of depreciation contemplated by rule 8(2). The department contended that in order to be entitled to the depreciation under these provisions the assessee must show that the ship was installed in Pakistan, which was not previously used in Pakistan. On the other hand the assessee supported the view taken by the Authorities under the Act and the High Court that it was only necessary to show that the ship was installed any where in the world during the relevant year. The High Court dealt with this question in the following manner: "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 Pakistan Companies, provided they were not previously used in Pakistan. This provision was indirectly applicable to foreign steamship companies also for purposes of determination including a decision about the admissibility or otherwise of initial and additional depreciation." As observed earlier under the second method provided for by rule 33, the entire exercise is directed towards computing the Pakistan income of the assessee notionally and, therefore, the provisions of the Act which are otherwise not applicable to the operations of the assessee outside the taxable territories, are also applied to such operations for determining the, profits and gains of the world income. The restricted view advanced on behalf of the department that installation of the ship in Pakistan for this purpose would be necessary, will therefore, be not in accordance with the requirements of rule 33 and indeed may in certain cases adversely affect the revenue. Clause (vi) of subsection (2) of section 10 of the Income-tax Act, 1922 was further amended by the Finance Act, 1967, so that the crucial words requiring interpretation in this case now read as under : "not having previously been used in Pakistan has been installed in Pakistan after the 31st day of March, 1945." Clause (vi), sub-clause (d) was also amended and read as under: "(d) In the case of ships whose port of registry is in Pakistan, to forty per cent of the cost thereof to the assessee." We agree with the High Court that the amendment has altered the meaning of the provision as it existed prior to the amendment and, therefore, for the purpose in question installation of a ship in Pakistan was not necessary at the material time in this case. It is on the record, that the Centrall Board of Revenue also interpreted the provisions to mean that it was not necessary for a ship of a foreign company to be installed in Pakistan for the purpose of initial and additional depreciation allowance.

10. For the foregoing reasons the judgment of the High Court is upheld and the appeal is dismissed with costs. M. Z. M. Appeal dismissed.