1985 PLP 183 (PTD)

785% Agreed depreciation: 4.483% Net Loss: 3.698% Loss applicable to Pakistan L.2.864 Exchange at ls‑6d to the Rupee Rs.38,186 Loss: Adjusted against other income Rs.11.007 Rs . 27 ,179" The Income‑tax Officer took the view that as the income of the applicant, which was assessable to tax under the Pakistan Income‑tax Act was from ships which had been chartered by the applicant and as such did not belong to the applicant, the applicant was not entitled to any depreciation. Accordingly, the Income‑tax Officer assessed income of the applicant without giving benefit of depreciation. According to the Income‑tax Officer, the claim of depreciation against such profit was not correct and the formula to be adopted was that "the ratio of profits before deduction of any previous loss of any accounting period as computed for the purposes of United Kingdom Income‑tax computed without making any allowance for wear and tear to the gross earnings of the Company's whole fleets and the ratio of loss before including any previous loss of any accounting period computed as above": It was further observed by the Income‑tax Officer that when assessment is of income from chartered ships, the question of depreciation is always to be ignored totally. Similarly for the assessment year 1968‑69 the contention of the applicant was not accepted and the Income‑tax Officer passed the assessment order in the light of his assessment order passed for the assessment year 1967‑

68. The Income‑tax Appellate Tribunal by their consolidated order, dated 27‑9‑1972 dismissed the appeals filed by the applicant. The, three questions on which our opinion is sought are: "(1) Whether in the facts and circumstances of the case the Tribunal was right in confirming the action of the Income‑tax Officer in not allowing depreciation on ships owned by the applicant whose Port of Registry was in United Kingdom when the receipts of all such vessels were also taken into consideration to determine the ratio of the profits to the gross earnings of the whole fleet? (2) Whether in the facts and circumstances of the case the Tribunal is right in holding that the Income‑tax Officer has computed the applicant's income under the Residuary method contemplated by Rule 40 of the Income‑tax Rules and not under the Second method of that Rule? (3) whether in the facts and circumstances of the case assuming that the Income‑tax Officer has made the computation under the Residuary method, he could disregard the depreciation in respect of the ships owned by the applicant when the receipts of such ships were also taken into consideration to determine the ratio of profit?" We have heard Mr. Ali Athar, learned counsel for the applicant and Mrs. Rashida Patel, learned counsel for the department. ,

3. It was contended by the learned counsel for the applicant that out of the three methods available under rule 40 of the income‑tax Rules, the Income‑tax Officer adopted the second method but did not give allowance for depreciation which was required to be given as profits had to be computed under the second method in accordance with section 10 of the Pakistan Income‑tax Act. According to the learned counsel, the ratio of profits of world income under the second method had to be worked out after allowing depreciation. It was further contended by the learned counsel that as the second method had been adopted, the Income‑tax Officer was not justified in refusing to give allowance for depreciation for calculating the world profits as computed under the Pakistan Income‑tax Act. It may be observed here that in the order, dated 27‑9‑1972, the Income‑tax Appellate Tribunal took the view that the Income‑tax Officer had followed .the Residuary method (the third method) provided for the rule 40 of the Income‑tax Rules and not the second method. On the other hand Mrs. Rashida Patel, learned counsel for the respondent, supporting the view taken by the department contended that the Income‑tax Officer had adopted the Residuary method and not the second method and the Residuary method adopted by the Income‑tax Officer was a reasonable method and in any case it did not violate any law. It was further contended that the entire income of the applicant, which was subject to Pakistan Income‑tax Laws had been earned by the applicant from chartered ships, which did not belong to the applicant and as such the applicant was not entitled to any allowance for depreciation.

4. It may be observed here that it is an admitted position that the income of the applicant subject to Pakistan tax comprised income from operating chartered ships, which did not belong to the applicant. Learned counsel for the respondent is correct to the extent that the applicant is not entitled to depreciation in respect of ships which did not belong to the applicant. However,' the main question in these cases is about the method that has been employed by the Income‑tax Officer in assessing the applicant under rule 40 of the Income‑tax Rules. The first method provide in rule 40 admittedly has not been applied by the Income tax Officer. It is also obvious that the returns were filed by the applicant in respect of the years in question under the second method. A perusal of the assessment orders of the Income‑tax Officer also indicates that the Income‑tax Officer had adopted the second method and not the Residuary method as wrongly observed by the Income‑tax Tribunal. What the Income‑tax Officer has done is that he has applied the second method but he has not given the benefit ‑of depreciation which benefit is available to an assessee under section 10 of the Pakistan Income‑tax Act. Under the second method provided in rule 40 of the Income‑tax Act, the profits on world income are to be computed in accordance with the provisions of the Income‑tax Act. When the second method is adopted what 'is under consideration is the world income and the world profits but the world profits are to be computed in accordance with the Pakistan Income‑tax Act and when such profits have been so computed, the ratio of such profits to the world income is applied to Pakistan Receipts to arrive at the figure of profits on Pakistan income for purposes of levy of Pakistan income‑tax. In our view both the Income‑tax Officer as well as the Income‑tax Appellate Tribunal misunderstood the real point involved while acting under the second method provided in rule

40. When the Income‑tax Officer is making assessment under Rule 40, it is the profits on world income that are to be determined and not the profits on Pakistan income. It is after the calculation of profits on world income and after determination of the ratio between the world profits calculated in accordance with provisions of the Income‑tax Act and the world income that such ratio is applied to the Pakistan income for arriving at figure of Pakistan profits fort levy of Pakistan income‑tax. The correspondence exchanged between the Income‑tax Officer and the applicant filed in this case include the letter, dated 25‑4‑1970 of the applicant addressed to the Income‑tax Officer; notice, dated 11‑6‑1970 of the Income‑tax Officer addressed to the applicant and the applicant's reply, dated 19‑6‑1970. These three documents also indicate that the Income‑tax Officer was proceeding to make the assessment of the applicant in respect of the years in question under the second method provided in rule 40 of the Income‑tax Rules. In our view as the Income‑tax Officer was applying the second method, he was required to determine the world profits strictly in accordance with the provisions of the second method and was wrong in not giving the benefit of depreciation for purposes of arriving at the world ratio of profits. If he was applying any other method that is he wanted to act under the Residuary method, he should have made it clear to the applicant that he was going to employ another method and in any case the assessment order should have clearly spelt out that he was applying the third method that is Residuary method. .

5. For the view that has been taken by us, the first two questions in this case are answered in the negative. As we have answered the first two questions in the negative, the third question has become infructuous. There will be no order as to costs. M.B.A. Questions answered in negative.