Commissioner Of Income-Tax, West... vs Isthmian Steamship Lines

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 12 November 1951

Coram: Fazl Ali

In the matter titled Commissioner of Income-Tax, West … versus Isthmian Steamship Lines, decided on 12 November 1951, the Supreme Court of India, with Justice Fazl Ali delivering the judgment, considered an appeal from a judgment of the Calcutta High Court that had been rendered in the exercise of the power conferred by Section 66(1) of the Indian Income-Tax Act, 1922. The appeal arose because the High Court, having been asked to advise on a question of law, had granted a certificate under Section 66A(2) to the Commissioner of Income-Tax, thereby permitting the present appeal to the Supreme Court. The respondent, Messrs. Isthmian Steamship Lines, hereinafter referred to as “the company,” was a corporation incorporated in the United States of America and operated steamships that made calls at Indian ports. The company’s profits arising in India were determined on the basis of “day on round voyage” and were taxed in India as the profits of a company, the assessment being made through the company’s appointed agents, Messrs. Angus Co., Ltd. During the assessments for the assessment years 1941-42, 1942-43 and 1943-44, the company contended that the unabsorbed depreciation that remained at the close of the financial year 1938-39 should be treated as part of the depreciation allowance for the year 1939-40. Accordingly, the company claimed that the unabsorbed amount ought to be carried forward further under Section 10(2)(vi) of the Income-Tax Act. This claim was rejected by the assessing Income-Tax Officer, by the Appellate Assistant Commissioner of Income-Tax and subsequently by the Income-Tax Appellate Tribunal. The Tribunal, at the instance of the company, referred a single question to the High Court for its opinion, namely whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the unabsorbed depreciation at the end of the year 1938-39, which had not been taken into account in the succeeding years, could not be treated as part of the allowable depreciation for the assessment years 1941-42, 1942-43 and 1943-44. The High Court answered this question in favour of the company and issued a certificate under Section 66A(2) enabling an appeal to this Court, which now forms the subject of the present appeal.

Before identifying the precise point of law that required determination, the Court found it useful to set out the wording of Section 10(2)(vi) of the Income-Tax Act as it existed prior to the amendment of 1939 and as it stood after that amendment, presenting the two versions side by side for comparison. In the former version, the provision stated: “Such profits or gains shall be computed after making the following allowances namely: in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed: Provided that— (a) the prescribed particulars have been duly furnished; (b) where full effect cannot be given to any such allowance in any year owing to there being no profits or gains chargeable for the year, or owing to the profits or gains chargeable being less than the allowance, the allowance…” The version after the 1939 amendment reads: “Such profits or gains shall be computed after making the following allowances namely: in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent 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 percentage on the written down value thereof as may in any case or class of cases be prescribed): Provided that— (a) No change. (b) where full… any year, not being a year which ended prior to the 1st day of April, 1939, owing… for succeeding years; and (c) No change.” The underlined and italicized words in the comparative display indicate the modifications effected by the amendment, which are central to the issue being considered.

In this case the Court set out Section 10(2)(vi) of the Income-Tax Act as it stood before the 1939 amendment and as it stood after that amendment, placing the two versions side by side. The provision required that profits or gains be computed after allowing depreciation on buildings, machinery, plant or furniture that belonged to the assessee. Before the amendment the allowance was to be a sum equal to a prescribed percentage of the original cost of the asset. After the amendment the provision was amended so that, where the assets were ships other than those ordinarily plying on inland waters, the allowance was to be a prescribed percentage of the original cost, and in every other case the allowance was to be a prescribed percentage of the written-down value of the asset. The amendment retained the original-cost basis for ocean-going steamers, inserted the words “where the assets are ships other than ships ordinarily plying on inland waters,” and otherwise left the remainder of the text unchanged. The amendment also added a parenthetical clarification that the provision applied only to years that did not end before 1 April 1939.

The Tribunal and the High Court correctly identified two material changes introduced by the 1939 amendment. First, before the amendment depreciation was calculated on the original cost of the asset; after the amendment it is calculated on the written-down value for all assets except ocean-going steamers, for which the original-cost basis continues. Second, the amendment provides that any depreciation which could not be fully taken in a year ending before 1 April 1939 may not be carried forward.

The amendment was intended to take effect from 1 April 1940. The dispute in the present appeal turned on the effect of the words, “Where 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 … the allowance or part of the allowance to which effect has not been given … shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance … and so on for succeeding years.” By this provision, any unabsorbed depreciation for a particular year is, by legal fiction, treated as part of the depreciation allowance for the next year.

The central question for determination was whether the company could be permitted to carry forward the unabsorbed depreciation that remained at the end of the financial year 1938-39 and treat it as part of the depreciation allowance for 1939-40, which would consequently make it part of the allowance for 1940-41. The Appellate Assistant Commissioner of Income-Tax was the authority whose decision on this point was being reviewed.

Income-tax authorities answered the issue by rejecting the assessee’s claim and gave two reasons for that rejection. The first reason was that, during the assessment for the year 1940-41, the question of whether the unabsorbed depreciation that remained at the end of the year 1938-39 could be carried forward and allowed in later years was examined by the Income-tax Officer. The Officer concluded that such forward carry-forward was not permissible. The company did not challenge that decision by filing an appeal, and consequently the matter could not be reopened in any subsequent assessment. The second reason given by the Income-tax authorities was that, owing to the amendment of the relevant provision, the respondent company was not entitled to carry forward the unabsorbed depreciation that existed at the close of 1938-39.

The Income-tax Appellate Tribunal did not rely on the first reason; instead it based its decision solely on the second reason concerning the amendment. In the present appeal, the Court does not consider the first ground because, as observed by the learned Chief Justice in the order allowing the appeal, the tax authorities appear to have adopted the Tribunal’s view on that point. They did not request the Tribunal to set out a case supporting the contention that had been accepted by the Appellate Assistant Commissioner but rejected by the Tribunal. Consequently, the only issue that remains for determination is whether the company was permitted to carry forward the unabsorbed depreciation that existed at the end of 1938-39. The Court holds that this issue was correctly resolved by the High Court in favour of the assessee.

The Court notes that two specific dates are relevant for this analysis: (1) 1 April 1940, the date on which the amended Act came into force, and (2) 1 April 1939, the date mentioned in the amended proviso. The initial question is whether these dates should be applied to the accounting year or to the year of assessment. It is held that they apply to the assessment year because, in income-tax matters, the law in force for the relevant assessment year governs unless a different intention is expressly indicated. Accordingly, the first date affected only the assessment year 1940-41, since the amendment was not operative until 1 April 1940. This implies that the pre-amendment law continued to apply to every assessment year up to and including the assessment year 1939-40.

In the assessment year 1938-39, the assessee reported a certain amount of unabsorbed depreciation in its accounts for the calendar year 1937, which constituted the assessee’s accounting year for that assessment year. Under the unamended provision, the assessee was entitled to carry that amount forward into the accounting year 1938, add it to the depreciation for 1938, and treat the resulting sum as the “allowance” for the assessment year 1939-40. The Income-tax Officer refused to permit that carry-forward, but, for the reasons already explained, the Court proceeds on the premise that the refusal should be disregarded for the purposes of this reference.

For the purpose of the reference, the Court must disregard the Income-tax Officer’s refusal. It must treat the unabsorbed depreciation that was carried forward from assessment year 1938-39 into the accounts of assessment year 1939-40 as the unabsorbed depreciation of 1939-40. This treatment follows because the profits of that year were insufficient to absorb the amount. In other words, the Court must accept the accounts as they would have appeared if the Officer had not wrongly refused to allow the unabsorbed depreciation of 1938-39 to be carried forward to 1939-40. The learned Chief Justice, in the judgment under appeal, observed that the mandatory provision of the old section required that the allowance for 1939-40 consist not only of the statutory percentage for that year. It must also include the unabsorbed depreciation from 1938-39. Thus, the hypothetical accounting treatment presumes that the depreciation amount would have been added to the 1939-40 allowance. It further assumes that the resulting figure would remain unabsorbed because the profit for that year did not exceed the combined allowance.

The discussion then moves to assessment year 1940-41, where the amended provision governs the treatment of any unabsorbed depreciation. The first issue is whether assessment year 1939-40 ended before 1 April 1939, because such years were expressly excluded from the carry-forward rule. It is clear that assessment year 1939-40 terminated on 31 March 1940 and therefore does not fall within the excluded category. Consequently, the amount deemed unabsorbed for 1939-40, which could not be taken into account because of the reasons stated in the amended section, may be carried forward into the accounts of assessment year 1940-41. It can also be carried forward to succeeding assessment years as long as it remains unabsorbed for the reasons described in the proviso. The proviso requires that full effect of the unabsorbed depreciation was not given in the preceding year because either there were no profits or gains chargeable. Alternatively, full effect is considered lacking if the profits or gains were less than the depreciation allowance. The appellant argued that in the present case full effect could not be given not because of the statutory reasons but because the assessee failed to appeal against the assessment for 1940-41. The Court regarded this argument as a misinterpretation of the provision, noting that the language uses the phrase “where full effect cannot be given” rather than “where full effect has been given”. The Court observed that the profits or gains for the year were indeed less than the depreciation allowance, satisfying the requirement set out in the provision.

In the final part of the judgment, the Court expressed its opinion that the position adopted by the High Court on the specific and limited question that had been referred to it was correct. The Court found no reason to overturn that view and therefore concluded that the appeal should not succeed. Accordingly, the Court ordered that the appeal be dismissed and that the costs of the proceedings be awarded against the appellant. The Court then reiterated the conclusion by stating that the appeal was dismissed. This final order thus affirmed the decision of the lower court on the matter before it and required the appellant to bear the costs associated with the appeal.