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Income-tax Case No. 278 of 1974, decided on 31st October 1985

--S. 10(2)(vi) (after amendment of 1967]--Income-tax Rules, 1922, Rr.33, 8 & 9-Depreciation allowance--Expressions "not having previously been used in Pakistan has been installed" before amendment and "not having previously been used in Pakistan has been installed in Pakistan" after amendment--Interpretation--Initial and additional depreciation, held, could be allowed to a ship which was installed in Pakistan.

In order to claim the initial and additional depreciation the ship must have been installed in Pakistan and the words "in Pakistan" has been added in order to remove the ambiguity which existed before the addition of these words in section 10(2)(vi) of the Income-tax Act, 1922.

In the present case the ship was not registered in Pakistan, therefore, the company was not entitled to the additional and initial depreciation allowance.

The allowance, claimed by the assessee in respect of the ships, which have not been installed in Pakistan cannot be claimed.

The rules are not to be interpreted so as to negate the provisions of section, 10(2)(vi). Rules have been framed under section 59 of the Act for carrying out the purposes of the Act and for the ascertainment and determination of any income or class of income to be included in the total income of an assessee and such rule may prescribe the manner in which, and the procedure by which the income, profits and gains shall be arrived at in the case of income derived in part from agriculture and in part from business by persons residing out of Pakistan etc., etc. So a rule can be framed within the framework of section 59 and no rule can be framed to make the provision of the Act redundant. Apart from the fact that rule 9(2) of the Income-tax Rules relates to imposition of duty it has to be read alongwith section 10(2)(vi) which is the principal section and the rule has to be construed in a way which is in consonance with section 10(2)(vi).

P L D 1985 S C 118 ref.

--- Amendment of statute--Presumption is that statutes passed to amend law are directed against defects, which have come into notice about the time when these statutes passed.

Maxwell on Interpretation of statutes ref.

--- Rules under a statute--Rules are not to be interpreted so as to negate provisions of statute or make them redundant.

---Rules ---Rules under a fiscal statute--Such Rules have to be read alongwith relevant section construed in a way which is in consonance with that section.

A.A. Darashani for Appellant.

Nasim Ahmad Khan for Respondent.

Date of hearing: 7th October, 1985.

--The respondent is a foreign Shipping Company assessed as an Association of Persons. In the assessment year 1968-69 the assessment was computed under section 23(3) of the Income-tax Act and income was computed under section 40 of the Insurance Rules. While computing the total world income the Income-tax Officer disallowed the respondent's claim for initial and additional depreciation on the ground that there was no provision under the Act for such allowance where the assets were installed (in this case ship registered) outside Pakistan. It was found that the respondent's ships were not registered in Pakistan and their port of registry was outside Pakistan and, therefore, the benefit of initial and additional depreciation was not allowed. Aggrieved by the order of assessment the respondent filed an appeal to the Income-tax Appellate Tribunal, which was allowed on 13-8-1973. The Commissioner of Income-tax, therefore, formulated the following question:

"Whether on facts and in the circumstances of the case the Income-tax Appellate Tribunal was justified in holding that the assessee was entitled to initial and additional depreciation on the ships which were not installed in Pakistan "

This question has been referred to this Court under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the Act.)

Section 10(2) (vi) of the Act before the amendment reads as under: -

"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 clause of cases be prescribed and where the buildings have been newly erected, or the machinery or plant not being motor vehicles not plying for hire or machinery or plant entitled to the development allowance under clause (vi-a) and not having previously been used in Pakistan has been installed in Pakistan after the 31st day of March, 1945 a further sum in respect of the year of erection or installation or the year in which such building, plant or machinery is used by the assessee for the first time for the purposes of his business, profession or vocation or the year in which commercial production is commenced, whichever is the later equivalent has been installed. "

The tax relating to provisions before and after the amendment are as follows:

"not having previously been used in Pakistan has been installed" and new provision "not having previously been used in Pakistan has been installed in Pakistan."

The interpretation of the earlier provision came before this Court and it was held that the principle of law appears to be helpful to the foreign companies even if their ships are not for the first time installed in the taxable territory provided that the assessment is made according to the second method prescribed by Rule 33 of the Income-tax Rules, 1922. This matter went upto the Supreme Court and the Supreme Court in P L D 1985 S C 118 upheld this view. It has been observed that the restricted view advanced on behalf of the department that installation of the ship in Pakistan for this purpose would be necessary, will, therefore, be not in accordance with the requirements of rule 33 and indeed may in certain cases adversely affect the revenue. In this respect para. 14 of the judgment made by the High Court in Reference No. 186 of 1964 is relevant which reads as follows:

Lastly, we may add that Mr. Ali Athar has drawn our attention to the principle of law hat where there is a doubt or ambiguity in the meaning of a fiscal provision, the interpretation beneficial to the tax-payer should be given to it. We are inclined to apply this principle to this case particularly because the situation has now, according to both counsel, been established beyond controversy after the amendment which was made in 1967."

The Supreme Court in the concluding para. of the judgment has observed that we agree with the High Court that the amendment has altered the meaning of the provision as it existed prior to the amendment.

Now the provision after amendment has made the position clear and the natural and ordinary meaning has to be applied. Therefore, in order to claim the initial and additional depreciation the ship must have been installed in Pakistan and the words 'in Pakistan' has been added in order to remove the ambiguity, which existed before the addition of these words in section 10(2)(vi).

In the present case this ship was not registered in Pakistan, therefore, the respondent-company was not entitled to the additional and initial depreciation allowance. Mr. Ali Athar who has appeared on behalf of the respondents in Reference No. 186 of 1964 had argued that the words having been added in 1967 is an indication of acknowledgement by the Legislature that the words did not convey the meaning which the newly added words have now given to the provision. We consider this contention well founded. In para. 12 of the judgment (Reference No. 186 of 1964) the Court observed that an amendment is often indicative of the intention of the Legislature to acknowledge an existing defect and to remove it by the amendment. In the words of Maxwell on Interpretation of statutes there is some presumption that statutes passed to amend the law are directed against defects which have come into notice about the time when these statutes passed.

The irresistible conclusion would be that the allowance claimed by the respondent in respect of the ships, which have not been installed in Pakistan cannot be claimed by the respondents. Learned counsel fort the respondent has referred to rule 9 and submits that this rule had not been amended and, therefore, that interpretation made by the High Court and the Supreme Court in the case referred to above would be applicable to this case also. Under rule 9 the allowance under clause (vi) of subsection (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.

No doubt the words 'in Pakistan' have not been added under sub-rule 2 of Rule 9 but this rule cannot go beyond the scope of the section but only lays down the rate for each of the five years. The rules are not to be interpreted so as to negate the provisions of section 10(2)(vi). Rules have been framed under section 59 of the Act for carrying out the purposes of the Act and for the ascertainment and determination of any income or class of income to be included in the total income of an assessee and such rule may prescribe the manner in which, and the procedure by which the income, profits and gains shall be arrived at in the case of income derived in part from agriculture' and in part from business, persons residing out of Pakistan etc. etc. So a rule can be framed within the framework of section 59 and no rule can be framed to make the provision of the Act redundant. Apart from the fact that rule 9(2) relates to imposition of duty it has to be read alongwith section 10(2) (vi) which is the principal section and the rule has to be construed in a way which is in consonance with section 10(2)(vi).

In this respect the instructions issued under the Finance Act, 1967 are relevant which reads as follows:

"Initial depreciation is available on a new plant and machinery. It is also available on plant and machinery whether old or new which is imported from abroad and which was not hitherto used in Pakistan. This provision has been interpreted in a way that initial depreciation will be available once in respect of a machinery which is used by an assessee outside Pakistan and income from which is assessed in Pakistan and second time when it is brought into Pakistan. The plea in this connection is that for allowance of initial depreciation the Act does not require that it should have been installed in Pakistan. This was not the intention. The subsection has been amended accordingly so that initial depreciation would be allowed only for plants and machinery installed in Pakistan. Similarly as regards ships initial depreciation allowance would be allowed in respect of ships whose port of registry is in Pakistan."

This provision would apply with effect from the assessment year 1967. The position, which emerges from the above is that initial and additional depreciation is allowed to a ship which has been installed in Pakistan.

In these circumstances we are of the opinion that the question referred to this Court by the Commissioner of Income-tax should be replied in the negative. There will be no order as to costs.

M. B. A. Question answered in negative.

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