K.S. VISWANATHAN, A.M. ORDER These are three appeals by assessee, foreign shipping company. issue involved in these three appeals being same, we dispose them of by common order. issue is whether depreciation, for which assessee is entitled to, should be allowed on basis of cost as reflected in books of account in foreign currency or it should be converted into Indian rupee as at time of acquisition of asset and depreciation allowed on that figure. issue gathers importance because owing to devaluation of Indian rupee, present book value of ships is much more than equivalent value in terms of Indian rupee in years in which ships were acquired. 2 . In order to understand issue, we will explain how assessee computed income for purpose of Indian income-tax. accounting year followed by assessee is calendar year. During calendar year 197 , some of ships had touched Indian ports. assessee has account of freight earnings from India in respect of these ships. This, however, is part of freight earnings of ships for each voyage. One illustration might make point clear. ship 'STRAAT CLARANCE' started voyage on 4th Nov., 1 9 6 9 . voyage lasted for 51 days. During course of this voyage, freight earnings amounted to 4 9 .481 guilders. total operating expenditure amounted to 4 99 .465 guilders. freight earned by this ship from Indian ports amounted to 133.622 guilders. assessee had worked out pro rata share of operating expenses in respect of this voyage. This amounted to 133.015 guilders. It would be seen that assessee suffered loss of about 9 guilders in total voyage. Now, ratio of Indian freight receipts to total receipts came to 26.63 per cent. This is how thepro rataexpenditure has been fixed at 133 guilders. proportionate loss as result of touching Indian ports came to 2.2 9 3 guilders. 3. This ship was built in 1 9 5 9 and it had been in use since 7th Nov., 1 9 5 9 . cost of ship was f. 14,720,000. Depreciation on straight line method amounting to 5 per cent would be f. 736.000 ; per day it would amount to f. 2.016. Now, total number of days as stated earlier, in this voyage was 51 days. depreciation proportionate to this voyage at rate of f. 2.016 per day came to f. 102.838. Now, we have mentioned that ratio between earnings from Indian ports and total earnings of voyage was f. 26.631. By applying this ratio, depreciation referable to ships touching Indian ports amounted to f. 27.387. 4 . In this manner, income arising to company on account of touching Indian ports had been calculated. net result for whole year is given below : "Loss before allowing depreciation 40,38 9 as per summary voyage results Depreciation as per statement 4,42,578 4,82, 9 Balance loss 67 Donations/charities as per 1,186 specification Entertainment as per specification 5,865 7,051 Less : Entertainment expenses incurred up to 28th February allowable 1,515 5,536 Balance loss 4,77,431 2,006 Balance loss 4,75,425 Converted into rupees at ratio Rs. 9 . 9 Loss N. fl. 10,000 = Rs. 20,833 ,453" above loss of Rs. 9 , 9 ,453 was claimed before ITO in assessment for year 197 1-72. In original assessment, ITO accepted this loss and completed assessment. It should be noted from above that assessee had computed Indian income in guilders and only after arriving at loss in terms of guilders of 4,75,425, Indian equivalent at current rate of 10,000 guilders, being equal to Rs. 20,833, was arrived at. depreciation of 4,42,575 guilders had been as per assessee's books. 5 . We have stated that this ship was purchased in 1 9 5 9 . assessment is in respect of calendar year 197 . In between acquisition of ship and accounting year, Indian rupee had been devalued. Thus, in terms of Indian rupee, cost of each ship and, therefore, written down value of each ship was much more during accounting year than when it was acquired. Had ship been depreciated on cost in rupees at exchange rate prevalent in 1 9 5 9 , i.e., year of acquisition of ship, assessee would be entitled to depreciation of Rs. 5,64,333. After devaluation, value of Indian rupee had gone down compared to guilders and at rate prevalent on last day of accounting year, depreciation amounted to Rs. 9 ,21,8 9 . 6 . ITO reopened assessments for three years we are now concerned with, since he was of view that assessee had been given excessive relief by way of depreciation. After reopening he reduced depreciation to Rs. 5,64,333 for assessment year, This led to reduction in business loss by Rs. 3,57,557. reduction effected for asst. yr. 197 2- 73 was Rs. 2,04,7 9 1 and for asst. yr. 197 3-74 was Rs. 1,56,604. 7. assessee took up matter in appeal. Although reopening of assessment was contested, CIT(A) found that reopening was proper. With regard to merits, he held that depreciation in terms of s. 32 of IT Act, 1 9 61 ('the Act') has to be allowed only in terms of Indian rupees. According to him, if depreciation is to be calculated at current rate of exchange after devaluation of Indian rupee, then depreciation allowable would total more than cost of ship. This could not be intention of legislature. He, therefore, felt that ITO was correct in holding that depreciation had to be worked out by applying old exchange rate prevailing at time when ship was acquired. 8. Against this finding, assessee has now come on further appeal. Shri S.E. Dastur, for company, submitted relying on certain decisions of Tribunal that computation of depreciation initially should be only in foreign currency only. He then pointed out that purpose of depreciation is that at end of period entire cost should be recouped. This purpose would be defeated if depreciation is given in Indian rupees at rates prevalent after devaluation. Shri Akhilesh Prasad, appearing for Department, submitted that depreciation has to be given only in terms of Indian rupees and that would be constant factor. According to him, ITO's method was correct method. 9 . We have considered facts of case. first point we have to decide before we take up issue involved is method by which ITO has computed income. Obviously, there is no question of books of account being basis for computation of income. books of account by itself would not show what was income earned in India. That has to be only fraction of world income. Now, r. 10 of IT Rules, 1 9 62 ('the rules') states how income in cases of non-residents could be determined. This rule gives three alternatives which are given below : "(i) at such percentage of turnover so accruing or arising as ITO may consider to be reasonable, or (ii) on any amount which bears same proportion to total profits and gains of business of such person (such profits and gains being computed in accordance with provisions of Act), as receipts so accruing or arising bear to total receipts of business, or (iii) in such other manner as ITO may deem suitable." In first alternative, ITO would have fixed particular percentage which is reasonable and applied it to total turnover. We have given in earlier paragraphs method in arriving at Indian income. This method does not appear to be in conformity with first alternative. 1 0 . second alternative is to find out proportion of Indian 1 0 . second alternative is to find out proportion of Indian receipts to total receipts and determine profits therefrom. It appears to us that ITO has adopted second method. assessee has given accounts of total earnings from each voyage per ship. They have also given freight earnings from Indian ports and have arrived at proportion which Indian earnings bear to total earnings. This is exactly what second alternative visualizes. fact that each voyage has been taken separately and proportion determined is only step taken in order to arrive at final proportion. So, we will give finding that ITO has adopted second alternative. 11. Now, once ITO has adopted second alternative, question is whether it is open for him to go behind depreciation fixed by assessee in their books of account and recalculate it. Now, rule says that profits and gains should be computed in accordance with provisions of Act. It does not say that such computation should be in terms of Indian rupees. It is equally possible to do computation in any foreign currency in which books of account are maintained. Act only provides for certain additions and disallowances. These additions and disallowances could be made irrespective of currency in which accounts are reflected. Therefore, when it comes to question of depreciation, it is not necessary that cost of ship should first be converted into Indian rupees at rate prevailing on acquisition of ships and peg depreciation to such cost in terms of Indian rupees so arrived at. If ITO does that, he would not be arriving at proportion total profit bears to Indian profits. That would be varied. rule, in our opinion, does not permit ITO to vary allowances which assessee is entitled to in determining total profits accruing to it in business. 12. In this connection, we will refer to decision of Calcutta High Court in case ofCIT vs. Ellerman Lines Ltd. ( 197 ) 75 ITR 47 (Cal). In that decision, reference is made to circular issued by then CBR which is reproduced at p. 52. For sake of convenience, we extract same below : "C.B.R. Cir. No. 7 of 1 9 42. C. No. 27(17)-I.T./41 dt. 10th Feb., 1 9 42. Sub. : Assessments -- British and other foreign shipping companies. Board has decided that instructions which appeared in paras 112 n d 113 of Income-tax Manual (7th edition) and which have been substantially reproduced at pp. 348-350 (excepting last two paras at p. 350) of Income-tax Manual (8th edition) should be followed in respect of assessments of foreign shipping companies from 1 9 40-41 onwards. These instructions,inter alia, allow foreign shipping company furnishing annual accounts for whole of its business, Indian and foreign, to adopt U.K. wear and tear allowance for purpose of computation of its income in accordance with second method provided by r. 33, and also allow British shipping company to elect to be assessed on basis of ratio certificate granted by U.K. authorities regarding income or loss and wear and tear allowance." It will be seen from above that under these instructions it will be clear that in respect of foreign shipping companies ITOs have been directed to adopt UK wear and tear allowance for purpose of computing income under r. 33 of Rules. Under these instructions which, in our opinion, to continue to be binding on ITO and under r. 10 which is corresponding to r. 33, wear and tear allowances should be corresponding to wear and tear allowance given in assessment in country of origin. It is well settled that wear and tear allowance is another name given to depreciation. From above, obviously, whatever has been allowed to shipping companies in foreign countries should be allowed in India also. It would appear to us, therefore, that allowance primarily has to be in currency in which foreign company would be assessable abroad. So, in our opinion, these instructions prohibit ITO to tinker with basic figures on which wear and tear allowance has to be granted. 13. It may be of interest to note that Supreme Court also gave their interpretation of this very same circular when matter came on appeal before them. This isEllerman Lines Ltd. vs. CIT 197 2 CTR (SC) 71 : ( 197 1) 82 ITR 9 13 (SC).It may be remembered that above instruction was given in 1 9 42. At that time there was no development rebate at all in statute. appeal before Supreme Court was in respect of asst. yrs. 1 9 60-61 and 1 9 61- 62. company claimed that development rebate is also to be allowed under same circular. This submission was accepted by Supreme Court. Supreme Court has pointed out that under r. 33 power vested on ITO is very wide power. That power is available to ITO as well as appellate authorities. While adopting basis given in Rules, ITO is not expected to rigidly apply various conditions prescribed in Act in matter of granting one or other permissible allowances. He may adopt any equitable basis so long as that does not conflict with Board's directions. Now, only equitable basis we could think of is basis in which assessee would get full depreciation of cost of ships in course of period of 20 years. If ITO's method is adopted, this equitable basis will stand defeated. In fact, this is one of arguments of Shri Dastur for acceptance of company's objections to reassessment. 1 4 . Calcutta High Court has once again considered whether circular we have referred to earlier can be considered for any assessment covered under Act. This was case ofCIT vs. Swedish East Asia Co. Ltd. ( 1 9 80) 1 9 CTR (Cal) 10 : (1 9 81) 127 ITR 148 (Cal).The facts of case incidentally are identical with facts of case before us as far as computation of income is concerned. Each voyage is taken separately and fraction referable to Indian earnings is determined as in this case. Tribunal had found that second alternative in r. 10 had been applied by ITO. This finding was approved by High Court. Therefore, our earlier finding that second alternative has been applied is now based on authority. This is only incidental observation. High Court therein was concerned with question whether ship could be allowed depreciation even after it had completed period of 20 years. High Court held that assessee was entitled to such depreciation insofar as company had not been assessed to income-tax in respect of income from that ship for period of 20 years. It was Department's contention that circular we have referred to would not allow any depreciation to be allowed for period beyond 20 years. High Court pointed out that circular insofar as it is against clear statutory provisions in Act will not be binding and will have to be discarded. assessee will have to be granted depreciation so long as statutory provisions are complied. Thus, circular is applicable for any assessment made under Act also. 1 5 . We may approach problem from another angle. Although depreciation is to be based on actual cost to assessee, that actual cost has to be determined in every assessment year. This is laid down by Bombay High Court inCIT vs. Bassein Electric Supply Co. Ltd. ( 1979 ) 118 ITR 884 (Bom). After noting authorities on this point, their Lordships held : ". . .The actual cost determined for particular asset can be altered or redetermined for particular assessment year . . . . Each year's income-tax assessment is self-contained. . . ." 16. So, for asst. yrs. 197 1-72 to 197 3-74, it is incumbent on ITO to redetermine actual cost. Now, what he has to determine is actual cost of assets to assessee. We place particular emphasis on expression 'to assessee'. What is required to be determined is what assessee had to pay. Now, this determination is as pointed out above, for each assessment year separately. For each assessment year, ITO must ask what did assets cost to assessee for this assessment year ? Not, what did assets cost to assessee in year he acquired it. When he asked question, answer is, say, in respect Of STRAAT CLARANCE f. 14.72 million. Even for asst. yr. 197 1-72, it remains at f. 14.72 million, but, since assessment finally has to be in terms of Indian currency, actual cost to assessee, redetermined for year 197 1-72, would be rupees equivalent of f. 14.72 million at exchange rate applicable in 197 1-72. So, assessee has right that his cost should be redetermined for each year and when assessee has acquired in terms of foreign currency, redetermination naturally would be by applying exchange rate relevant to assessment year concerned. 17. above proposition does not lay down ratio that whenever asset is acquired by payment in foreign currency, cost of asset to assessee must be redetermined every year with reference to exchange rate. What we lay down here would apply only where accounting is also done in foreign currency. That would invariably mean only non-residents whose Indian income has to be computed by applying r. 10. 1 8 . provisions of s. 43(6) of Act does not require anything inconsistent with assessee's plea. That is because of nature of asset. They are ships and there is no requirement in rules that depreciation should be on written down value. Ships are depreciated at actual costs to assessee on straight line method. Perhaps, different considerations might prevail in case of asset, where written down value has to be ascertained. We are not concerned with them in this appeal. 1 9 . There is yet another angle to this question. That is application of provisions of r. 115 of rules. rule is reproduced below : "The rate of exchange for calculation of value in rupees of any income accruing or arising or deemed to accrue or arise to assessee in foreign currency or received or deemed to be received by him or on his behalf in foreign currency shall be telegraphic transfer buying rate of such currency as on specified date." Now, this rule postulates that rate of exchange has to be applied only after determining 'income accruing or arising to assessee in foreign currency.' exchange rate is to be considered only after income has been determined. 'income' necessarily means income as defined in s. 2(24) of Act. That can be arrived at after allowing for all deductions permissible under Act. This includes deduction by way of depreciation under s. 32. So, application of rule i.e., conversion of foreign currency to Indian rupee, would be last step. Therefore, determination of depreciation has to be only in terms of foreign currency only, that being step in process of determining income. 2 0 . For these reasons, we hold that assessee is entitled to depreciation claimed and allowed in original assessments. additions in reassessments are deleted. appeals are allowed. *** ROYAL INTEROCEAN LINES v. INCOME TAX OFFICER