M/s. Everett Ori­ent Lines Inc. Vs. Commissioner of Income Tax Ctg Zone, Ctg

M/s. Everett Ori­ent Lines Inc.

 Vs.

Commissioner of Income Tax Ctg Zone, Ctg,

Supreme Court

Appellate Division

(Civil)

Present:

Kemaluddin Hossain CJ

Fazle Munim J

Badrul Haider Chowdhury J

Shahabuddin Ahmed J

M/s. Everett Ori­ent Lines Inc. c/o M/s. United Liner Agencies of Bang­ladesh Ltd….. Appellant.

Vs.

Commissioner of Income Tax Chittagong Zone, Chittagong……Respondents

Judgment

March, 11, 1982.

Lawyers Involved:

Syed Ishtiaq Ahmed, Advocate. Mohammad Hossain, Advocate instructed by S. M. Huq, Advocate-on-Record—For the Appellant.

Mahmudur Rahman, Advocate -instructed by Md. Sajjadul Huq, Advocate-on-Record — For the Respondent.

Civil Appeal Nos. 129 of 1980 and 130 of 1980.   

On appeal from the judgment and order dated 23-6-1980 passed by the High Court Division in Application No. 125/72.

Judgment:

 Badrul Haider Chowdhury J.—These are two certificated appeals under section 66 (a) (2) of the Income Tax Act.

The assessee-appellant is a Company incorporated outside Bangladesh but carries on business in Bangladesh through local Agents. It is Shipping Company and it plies ships from and to ports in Bangladesh. During the assessment year 1968-69 the Assessee Company claimed depreciation on the value of the three ships, namely ‘Hugh Eve­rett,’ Murray Everett’ and ‘Monolo Everett’. The Company claimed additional depreciation apart from the normal depreciation for the third year out of the five years entitlement. The Income-tax officer refused such additional dep­reciation. Thereafter, the Appellate Assistant Commissioner while disposing of the appeal observed:

“The Income Tax Officer was not legally justified to disallow the claim of addi­tional depreciation. The benefit of addi­tional depreciation, for the three ships mentioned above will also be given to the appellant in computing the income of the appellant in the year under appeal. The Income Tax Officer is, therefore, directed to allow additional depreciation on the ships in accordance with law.” Income Tax Officer was directed to revise the assessment order accordingly.

2. Thereafter, the Department preferred appeal before the Appellate Tribunal against the decision of the Appellate Assistant Commissioner in allowing additional deprecia­tion on the three ships. It was contended by the department that the additional depre­ciation was not allowable because the ships were not installed in Pakistan. The Appellate Tribunal considered that it is immaterial whe­ther the ships were installed or not in Pakistan for the purpose of additional depreciation under Rule 9(2). It was, however, noticed that the vessel ‘Monolo Everett’ was installed after the first day of July, 1965 and, therefore, that the vessel is not entitled to additional depreciation under Rule 9(2). The Appellate Tribunal, however, upheld the decision of the Appellate Assistant Commissioner insofar as the other two ships are concerned for the additional depreciation. Accordingly, the tribunal sent the case back to the Income Tax Officer for revising the as­sessment order. Thereafter, the Revenue filed the application under section 66(1) of the In­come Tax Act before the High Court Division referring the two questions:

“(i) Whether in the facts and in the cir­cumstances of the case, the Income Tax Appellate Tribunal has correctly inter­preted the provisions of section 10(2) (vi) of the Income Tax Act and of Rule 9 (old) rule (8) of the Income Tax Rules and was justified in allowing additional depreciation in respect of the vessels which did not ply in Pakistani waters during the period in question and which had not been installed in Pakistan.”

(ii) Whether the insertion of the word ‘in Pakistan’ after the words has been installed” by the Finance Act of 1967 (Act XII of 1967) in section 10(2) (vi) and rules 9(old Rule) of the Income Tax Rules has changed the Character of the law and, if so, whether the amendment imposed a bar disallowing of the benefit of additional depreciation in respect of the plant and machineries which are not installed in Pakistan (Bangladesh).

The reference was heard by the Division Bench of the High Court. The learned Judges of the High Court Division without answering the question suo moto entered into discussion as to the vires of rule 9(1) of the Income Tax Rules. The learned Judges considered that the rules 9(2) are in the form of substantive pro­vision. It was observed:

“From a careful reading of rule 9(2) it appears that by this sub-rule attempt has been made to allow depreciation for all newly acquired plants and machinery including ocean going vessel for a pe­riod of five years from the date of its installation or registration as the case may be such provision is nowhere avail­able within the four corners of the present provisions, under clause VI of sub-section (2) of section 10 of the Income Tax Act.”

3. Thereafter the learned Judges consi­dered clause VI of sub-section (2) of section 10 of the Income Tax Act and observed that:

“the Act provides for a general normal depreciation for every year for all ships and a further special depreciation al­lowance for one year only with regard to such plants, machineries and ocean going ships for the year in which such plants, machineries and ocean going ships were installed and registered in Bangladesh. There being no provi­sion for additional allowance of depre­ciation for five years for newly acquired plants, machineries and ocean going ships starting from the year of their installation or registration in the afore­said provisions of clause VI of sub-section (2) of section 10 of the Income Tax Act, such provisions could not be made in the Income Tax Rules by virtue of rule 9(2) thereof, and as such rule 9(2) could not provide any such additional allowance of depreciation.”

In this view of the matter the High Court Division declared that rule 9(2) is ultra vires of section 10(2)(vi) of the Income Tax Act. Thereafter the learned Judges answered the questions referred to in the negative and set aside the decision of the Tribunal confirming the decision of the Appellate Commissioner. Certificate, however, was given under section 66(2)(a) of the Income Tax Act.

5. Syed Ishtiaq Ahmed, the learned Coun­sel for the assessee canvassed that rule 9(2) had been framed under Rule-making power in section 59(1)(e) and no one has ever doubted or questioned the vires of the Rule itself. The learned Judges, it is contended suo moto, considered the vires of the Rules and declared it as ultra vires. It was neither raised by the Department nor raised by the assessee and it was simply raised by the learned Judges for coming to their decision. Mr. Mahmudur Rahman, Advocate, appearing for the respon­dent did not support the High Court judg­ment as to the vires of the Rule. He simply con­tended that the assessee is not entitled to the benefit of additional depreciation. He further contended that the Finance Act 1961 creates a bar to the benefit of additional depreciation and the appellant is not entitled to such benefit any longer.

5. The appellant claimed initial and addi­tional depreciation as per Income Tax Act Rules. The Income Tax Officer disallowed initial depreciation and additional deprecia­tion by observing that as these ships were not installed in Pakistan no initial or additio­nal depreciation could be allowed. Hence, the claim for additional depreciation was also rejected. Thereafter, the assessee moved the Appellate Assistant Commissioner. The Appe­llate Assistant Commissioner after consider­ing the appeal of facts and law came to the conclusion that:

“The benefit of additional deprecia­tion for the three ships mentioned above will also be given to the appellant in computing the income of the appellant in the year under appeal. The Income Tax Officer is, therefore, directed to allow additional depreciation on the ships in accordance with law.”

Thereafter the Department filed the appeal before the Tribunal. The Tribunal considered that one of the ships namely, Monolo Everett was installed after the first day of July 1965 and, therefore, this ship is not entitled to additional depreciation under rule 9(2). As for the argument of the departmental representative that the assessee is not entitled to additional depreciation, the Tribunal noticed.

“We, however, find that there is nothing in rule 9(2) of the Income Tax Rules, which requires that the ships must be installed in Pakistan to be entitled to additional depreciation unlike ini­tial depreciation which cannot be allow­ed unless the ships are installed in Pakis­tan as per amendment made in section 10(2) (vi) by the Finance Act of 1967: It is immaterial whether or not the ships were installed in Pakistan for the purpose of additional depreciation under rule 9(2).

Thus both the Appellate Assistant Commissioner and the Tribunal took the view that the Income Tax Officer was wrong in taking the view regarding the additional depreciation. So far as the quantum of assessment or the met­hod of calculation are concerned there was no controversy. The only question was that of entitlement and the first question was framed in clear language whether the Income Tax Appellate Tribunal has correctly inter­preted the provisions of section 10(2)(vi)of the Income Tax Act and rule 9 (old Rule 8) of the Income Tax Rules and justified in allowing additional depreciation in respect of the vessels which did not ply in Pakistani waters during the period it question and which had not been installed in Pakistan and the second question was whether the amendment by the Finance Act of 1967 imposed a bar disallowing the benefit of additional deprecia­tion in respect of the plant machineries which are not installed in Pakistan. The learned Judges instead of proceeding to answer the question took up a point of law which was not agitated by any of the parties nor raised by any quarter.

6. It will be convenient to consider section 10(2) (vi).

Section 10. (2) Subject to the provisions of this Act, such profits or gains shall be computed after making the following allowance, namely;

(vi) in respect of depreciation of such buildings, machinery, plant, or furniture being the property of the assessee, a sum equivalent where the assets are ships other than ships ordinarily plying on 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  created, or the machinery or plant not being motor vehicles not plying for hire or machinery or  plant entitled  to the  development allowance under clause (via) and not having   pre­viously been used in (taxable territories) has been installed in (taxable territories) after the   31st  day of March,  1945 a further sum     in respect of the year of erection of installation for the  year  in which such building, plant or machinery is used by the assessee for the  first time for the purpose of his business, profess­ions or vocation or the year in which commercial production is commenced, whichever is the later equivalent –

(c)  in the case of machinery or plant other than ships, for motor vehicles not plying for hire to twenty-five per cent of the cost thereof to the assessee;

(d)  in the case of ships (whose port of registry is in taxable territories), to thir­ty per cent of the cost thereof to the assessee.

Rule 9 reads as under:

9(1) the allowance under clause (vi) of sub-section (2) of section 10 in respect of depreciation of buildings, machinery, plan or furniture shall be at percentages of the written down value or original cost, as the case may be equal to the number shown in the corresponding entry in the second column of the following statement. (2) In respect of plant and machinery not  having been previously used in Pakistan and not being machinery or plant entitled to development allow­ance under clause (via) of sub-section (2) of section 10 installed on or after the first day of April, 1948. and before the first day of July, 1965, the allowance for each of the five previous years beginning with the year of installation or the year in which commercial production is com­menced whichever is the later, shall be twice the amount of the allowance com­puted in accordance with sub-rule (1).

7. It will be noticed that the clause (vi) provides depreciation ‘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 be in any case or class of cases be “prescribed”. Section 2 clause (10) defines ‘prescribes’ nam­ely, prescribed by Rules made under this Act. Section 59 which is the rule making power reads as under:

“The National Board of Revenue may make rules for carrying out the purposes of this Act and for the ascertainment and determination of any income or class of income to be included in total income of an assessee. Such rules may be made for the whole of taxable territories or for such part thereof as may be specified; (2) without prejudice to the generality of the foregoing power, such rules may—

(e) provide for any matter which by this Act is to be prescribed.

8. It is obvious that the learned Judges have fallen into an error of law in coming to the conclusion that the provisions similar to those contained in rule 9(2) can only be made by a legislative enactment and not by subordinate legislation made by the National Board of Revenue. With respect to the learned Judges, they have clearly misread the enactment and the rule of interpretation. The law itself has given the power to the National Board of Revenue to determine the percentage by prescribed Rules and rule 9 is such a rule. The judgment of the High Court Division is wrong and cannot be sustained on this score alone.

9. The benefit of initial depreciation has been made available to the residents for the purpose of encouraging the local shipping company and also to encourage the shipbuil­ding industries and with this end in view the benefits of initial depreciation were not made available to the foreign shipping companies by amending section 2(vi) by the Finance Act of 1967.

10. As for the additional depreciation the Tribunal took the correct view. There is nothing in rule 9(2) which requires that the ships must be installed in the taxable territo­ries to be entitled to additional depreciation. Initial depreciation cannot be allowed unless the ships are installed in the taxable territories as per amendment made in section 10(2) (vii) by the Finance Act of 1967. The Tribunal correctly noticed that one of the ships namely, Monolo Everett, was not entitled to the addi­tional depreciation as the same was installed after 1.7.1965.

11. Analysis of section 10(2) (vi) reveals that two types of depreciations are allowed. The sub-clause consists of two portions: the first portion provides for allowance of the normal depreciation and such allowance avail­able to both residents and non-residents on the basis of user. The second portion provides for allowance of a further sum of deprecia­tion which is popularly called as initial de­preciation’ and the rates are prescribed in the statute itself. The claim for additional dep­reciation which is a part of normal deprecia­tion by the assessee could not be disallowed as the vessels were installed before 1st July, 1965. The amendment of 1967 was not given retrospective effect and, therefore, it could not extend to the assessment year in question. Moreover, the amendment had no relevancy. The Rule itself says that it must be installed on or after 1st April, 1948 and before the first day of July, 1965. The High Court Divi­sion unfortunately by taking into consider­ation these irrelevant matters have confused the issue at point and fallen into a grave error. So the simple answer is that the allowance of depreciation in respect of new plant machineries including ships installed after 1.4.1948 and before 1.7.1965 at twice the amount of the normal rate of depreciation for a period of 5 years from the year of installation. This was to encourage rapid industrialisation. The benefit of such deprecia­tion was allowed to residents and nonresidents provided they are installed between 1.4.1948 and 30.6.1965. The questions framed do not strictly arise out of the Tribunal, far less the question of vires. That the reasoning adopted by the High Court Division is fallacious is clear when sub-rule (1) of rule 9 is considered. It reads:

“9. (1) the allowance under clause (vi) of sub-section (2) of section 10 in respect of depreciation of buildings, machinery, plant or furniture shall be at percentages of the written down value or original cost, as the case may be, equal to the number shown in the corresponding entry in the second column of the follo­wing statement.”

12. If the reasoning adopted by the High Court Division is pressed to its logical con­clusion then sub-rule (1) becomes ultra vires as it provides for extra special and other types of depreciation in addition to the depreciation as rule 9(2) provides for additional depreciation in respect of assets installed between 1.4.1948 and before 1.7.65 for a period of 5 years from the year of installa­tion. Be it noted that the benefits have been enjoyed over a long period by various assessees to whom the allowances are so allowable. To knock out such beneficial provision on the ground of vires a cogent reason is to be advanced. But in the face of section 59 (1) (e) such inferences could not be drawn. The High Court has departed from all canons of interpretation while considering the vires of rule 9 when the point was neither raised nor debated by any quarter.

In the result, therefore, both the appeals are allowed. The judgement of the High Court Division is set aside and the orders of the Tribunal are restored. There will be no order as to costs.

Ed.

Source: 1982, (AD)

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