Court affirms Tribunal decision for non-resident shipping company, allowing depreciation on old ships.

The court affirmed the Tribunal's decision, ruling in favor of the non-resident shipping company, allowing depreciation allowance for ships acquired more than twenty years ago due to the exclusion of war years. The court emphasized that CBDT instructions cannot override statutory provisions. Each party was ordered to bear its own costs.

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Issues Involved:
1. Entitlement to depreciation allowance for ships acquired more than twenty years ago.
2. Applicability of Rule 10 of the Income-tax Rules, 1962.
3. Validity and binding nature of CBDT instructions.
4. Computation of total world income and its impact on Indian income.

Issue-wise Detailed Analysis:

1. Entitlement to Depreciation Allowance for Ships Acquired More Than Twenty Years Ago:
The primary issue was whether the assessee, a non-resident shipping company, was entitled to depreciation allowance under Rule 5 of the Income-tax Rules, 1962, for ships Bali and Mindore, acquired in 1941, beyond the twenty-year period typically allowed for depreciation. The Income Tax Officer (ITO) had disallowed depreciation on these ships for the assessment year 1963-64, citing that they had completed twenty years in the assessment year 1961-62. However, the Appellate Assistant Commissioner (AAC) accepted the assessee's contention that the ships did not touch any Indian port between April 1940 and December 1945 due to war, and thus depreciation should be allowed up to the assessment year 1966-67. The Tribunal upheld this view, stating that there was no prohibition under the Indian Income-tax Act against allowing depreciation on ships part of the company's fleet for more than twenty years, provided they were employed in connection with the company's Indian trade.

2. Applicability of Rule 10 of the Income-tax Rules, 1962:
Rule 10 provides methods for determining the income of non-resident companies when the actual amount cannot be definitely ascertained. The AAC applied Rule 10(ii), which involves determining the total world income and then applying the ratio of Indian freight to the total world freight to compute taxable income. The AAC concluded that depreciation is allowed only for determining the total world income and not as a separate deduction for Indian income. The Tribunal, however, held that the assessee was entitled to depreciation allowance on the ships in question as prescribed in Appendix I in terms of Rule 5, subject to the limitation of Section 34(2)(i) of the Income-tax Act, 1961.

3. Validity and Binding Nature of CBDT Instructions:
The Tribunal's decision was influenced by the instructions issued by the Central Board of Direct Taxes (CBDT), which were deemed inconsistent with the provisions of the Act. The court noted that while instructions beneficial to the assessee were binding on the Income-tax authorities, they could not curtail the provisions of the Act. The court referenced several Supreme Court judgments, emphasizing that instructions could not override the statutory provisions of the Act. The court concluded that the instructions limiting depreciation to twenty years were inconsistent with the Act and thus not binding.

4. Computation of Total World Income and its Impact on Indian Income:
The AAC's method involved computing the total world income and applying the ratio of Indian freight to this total to determine the taxable Indian income. The Tribunal found that for the war years (April 1940 to December 1945), the assessee did not suffer any Indian taxation, and thus, no depreciation was allowed for those years. The court upheld this view, stating that the assessee should not be deprived of depreciation for those years as no Indian assessment occurred, and thus no double depreciation issue arose.

Conclusion:
The court affirmed the Tribunal's decision, holding that the assessee was entitled to depreciation allowance for the ships beyond the twenty-year period due to the war years' exclusion. The court also emphasized that CBDT instructions could not curtail the statutory provisions of the Act. The questions referred were answered in favor of the assessee, with each party bearing its own costs.

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