Treaty depreciation computed under domestic tax law where no special method is prescribed and the more beneficial rule applies

Where an Indo-French treaty does not prescribe a special depreciation method or define written down value, undefined terms take meaning from domestic law and all reasonable deductions must be allowed in computing industrial or commercial profits. The treaty's non-discrimination clause and section 90(2) supported application of the more beneficial domestic tax provision to the treaty assessee. On that basis, depreciation on the rig was allowable under the Income-tax Act, 1961, rather than being confined to a treaty-based wear-and-tear approach, and the assessee's claim was accepted.

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Issues: Whether, in computing the income from the IDA contract under the Indo-French treaty, depreciation on the rig had to be allowed under the Income-tax Act, 1961, or only on the basis of wear and tear under the treaty.

Analysis: The treaty did not define written down value or prescribe a special method for computing depreciation. Article II provided that undefined terms in the agreement would take their meaning from the domestic law of the contracting State. Article III required allowance of all reasonable deductions in determining industrial or commercial profits. The treaty's non-discrimination clause also supported equal treatment of a foreign enterprise with a resident taxpayer. The decision was reinforced by the CBDT circular and by section 90(2), which permits application of the more beneficial provisions of the Income-tax Act to a treaty assessee. In that setting, depreciation under the Act was treated as a permissible deduction while computing the treaty income.

Conclusion: Depreciation was required to be computed and allowed under the Income-tax Act, 1961, and the assessee's claim was accepted.

Ratio Decidendi: Where a tax treaty does not prescribe a specific method for computing depreciation, and its terms direct undefined expressions to domestic law, depreciation is to be determined under the Income-tax Act if that regime is more beneficial to the assessee.

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