Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, MADHYA PRADESH
Vs.
RESPONDENT:
M/S. NANDLAL BHANDARI MILLS LTD.
DATE OF JUDGMENT:
07/12/1965
BENCH:
SUBBARAO, K.
BENCH:
SUBBARAO, K.
SHAH, J.C.
SIKRI, S.M.
CITATION:
1966 AIR 1026 1966 SCR (2) 925
CITATOR INFO :
F 1967 SC 455 (10)
ACT:
Taxation Laws (Part B States) (Removal of Difficulties)
Order, 1950, Para 2, proviso-Depreciation allowed to non-
resident company in Part B States as well as in India-
Fraction of total world income taken as Indian income-
Depreciation allowed against total world income whether
depreciation ’actually allowed’ against Indian
income---Computation of written down value after 1950.
HEADNOTE:
In the years prior to 1950 the respondent company with
headquarters in the erstwhile state of Indore was assessed
to tax under the Indore Industrial Rules, 1927 and also
under the Indian Income-tax Act, 1922 in so far as its
income fell within ss. 4(1) (a) and 4(1)(c) read with s. 42
of the Act. Depreciation had been allowed to it under the
Indore Industrial Rules as well as the Indian Act. The
written down value of its assets for the purpose of 1950-51
and subsequent assessments had to be determined under the
Taxation Laws (Part B States) (Removal of Difficulties)
Order, 1950 which laid down in the proviso to paragraph 2
that .where in respect of any asset, depreciation has been
allowed for any year, both in the assessment made in the
Part B State and in the taxable territories, the greater of
the two sums allowed shall only be taken into account." The
Income-tax Officer found that up to and including the year
1944 the sum allowed as depreciation under the Indian
Income-tax Act was larger and therefore in computing written
down value as on 1-1-49 he took the sum allowed as
depreciation under the Indian Act up to the end of 1944 and
under the Indore Industrial Rules after that date. In the
assessments made for the period up to the end of 1944 the
respondent company had been treated as a non-resident and
its taxable income under the Indian Income-tax Act had been
worked out under Rule 33 of the Indian Income-tax Act, 1922
as a fraction of its total world income. In determining the
total world income the depreciation claimable under the
Indian Act had been allowed, and it was the full amount of
this depreciation allowed against the total world income
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that the Income-tax Officer took into account in determining
the written down value of the respondent company’s assets
for the purpose of the 1950-51 assessment. The respondent
company claimed that as only a fraction of the total world
income had been treated as taxable income, therefore only a
fraction of the depreciation allowed against the world
income should be taken as having been ’actually allowed’ in
the terms of paragraph 2 of the Removal of Difficulties
Order. The Income-tax Officer, the Appellate Assistant
Commissioner and the Appellate Tribunal having rejected this
plea the matter went in reference to the High Court. That
Court took the view contended for by the respondent viz.
that only the proportionate amount of depreciation which was
attributable to the taxable income could be taken into
account. The Revenue appealed to this Court
It was urged on behalf of the appellant that depreciation
was allowed in respect of the use of the assets in the
business, that the allowance did not depend on the
assessable income, and that the High Court, therefore went
wrong in striking a proportion on the basis of a part of the
income
926
actually assessed under the Indian Income-tax Act. The
different expressions used in various parts of paragraph 2
of the Removal of Difficulties Order came for consideration.
HELD : Per Subba Rao and Sikri, JJ.-(i) The word
"assessment" used in the proviso to paragraph 2 has been
given a very wide meaning in decided cases. It means
sometimes ’the computation of income’, sometimes the
determination of the amount of tax payable; and some,times
the procedure laid down in the Act for imposing liability
upon the tax-payer. The proviso used the word ’assessment’
both with reference to Part B States and also with reference
to the taxable territories. But in the present case the
different shades of meaning of the said word were not
relevant. For the purpose of computing the written down
value, the amount of depreciation- allowed for the purpose
of the assessment only was relevant. [931 G-H; 932 A]
(ii)The key to the understanding of paragraph 2 is the
expression "allowed’. The expression ’actually allowed’ in
the main paragraph, ’allowed’ in the proviso, and ’taken
into account’ in the Explanation mean the same thing. What
the Income-tax Officer has to take into consideration in
computing the written down value is the depreciation
actually allowed under the Income-tax Act or the laws
obtaining in Part B States and adopt the greater of the two
sums so allowed under that head. The determination of the
depreciation actually allowed under the Income-tax Act for
the years up to and including 1944 must depend on the
provisions of that Act. [932 B]
(iii)Under the Income-tax Act depreciation allowance is in
respect of such assets as are used in the business and shall
be calculated on the written down value, which means, in the
case of assets acquired in the previous year, the actual
cost to the assessee, and in the case of assets acquired
before the previous year, the actual cost to the assessee
less all depreciation actually allowed to him under the Act.
The allowance towards depreciation is conditioned an the
user of the assets, wholly or in part., during the
accounting year and thus contributing to the earning of the
income. Though it is not unrelated to the profits it does
not depend upon the increase or decrease in the earning
capacity of the assets, but is only linked up with physical
depreciation in their value. Even so only amount of
depreciation actually allowed can be deducted from the
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original cost of the assets to ascertain the written down
value. De hors such an allowance., it has no significance
in income-tax law. [932 F-H;933 A-B]
(iv) During the years up to and including 1944 the assessee
was taxed as a nonresident on the income which fell under s.
4(1)(a) or unders. 4(1)(c), read with s. 42 of the Indian
Income-tax Act. The assessee was only assessed during the
said years in respect of that part of its profits which
could be said to be attributable to the sale proceeds or
goods received in British India or in regard to which
contract-, were signed in British India. Such income was
brought to tax in terms of r. 33 of the Indian Income-tax
Rules, 1922. The method adopted was that the amount of
income for the purpose of Indian Income-tax was calculated
on an amount which bore the same proportion to the total
profits of the business as the receipts accruing or arising
in India bore to the total receipts, of the business. By
applying the formula in r. 33 the Income-tax Officer had
actually allowed only a fraction of the amount towards
depreciation allowable in assessing the world income of the
assessee. The mere fact that in the matter of calculation
the total amount of depreciation was first deducted from the
world income and thereafter the proportion was struck in
terms of r. 33 does not amount to an actual allowance of the
entire depreciation in ascertaining the tax-
927
able income accrued in India. The Income-tax Officer could
have adopted a different method by first ascertaining the
gross income accrued in India and then deducting from it the
allowance under the Act proportionate to the said income.
Whatever method was adopted only a fraction of the total
depreciation was actually allowed in ascertaining the
taxable income in India. The view taken by the High Court
was therefore correct. [933 B-H]
Hakumchand Mills Ltd. v. Commissioner of Income (Central)
Bombay, (1963) 47 I.T.R. 949, endorsed.
Per Shah, J. (dissenting)-Under s. 10 of the Income-tax Act
taxable profits or gains earned by an assessee under the
head ’business’ after making appropriate allowances under
Subs. (2) have to be computed. One of such allowances is
depreciation in respect of the assets used for the purpose
of business. But depreciation determined according to the
rules merely enters into the computation of taxable profits,
whether the assessee is a resident or a non-resident. In
the assessment of a company the same rates of tax apply
under the Income-tax Act, whether the company is resident or
non-resident. If the company is resident under s. 4A(c) its
entire world income would be chargeable, subject of course
to special exemptions like those provided in s. 14(2)(c) :
if it is nonresident only a slice of the income would be
chargeable. Under the scheme of the Indian Income-tax Act
depreciation like any other allowance has to be allowed in
computing the total profit; after the total profit is
determined depreciation does not survive as a separate head
of allowance. A part only of the total profit of a company
determined in the manner prescribed-by s. 10, may be
taxable. But total profit being determined after
depreciation is allowed, between the taxable profits-which
may be a fraction of total profits-and depreciation there is
no definable relation. Therefore it is wrong to presume
that the depreciation allowed in the taxable territories
which is to be taken into account under the proviso to
paragraph 2 of the Removal of Difficulties Order is a
fraction of the depreciation considered for computing total
profits. [940 E-H; 941 A-D]
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The fact that income was computed under r. 33 made no
difference. In the ascertainment of total profits either
for the purposes of assessment in the ordinary manner when
the income of the assessee is determined or when a fraction
is to be adopted for the purpose of the second method
contemplated by s. 33, there is no scope for assuming that
only a fraction of the depreciation is actually allowed.
Depreciation is deducted only once and for all, and it is
deducted in determining the total profits of the business.
[942B-D]
There is therefore no warrant either in s. 10(2)(vi) or in
paragraph 2 of the Removal of Difficulties Order or in r. 33
framed under the Indian Income-tax Act for the view that the
depreciation allowed is a fraction of the total depreciation
of the business. [942 H]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 629 to 632
of 1964.
Appeals from the order dated September 22, 1961 of the
Madhya Pradesh High Court in Misc. Civil Case No. 277 of
1960.
A. V. Viswanatha Sastri, R. Ganapathy Iyer, B. R. G. K.
Achar and R. N. Sachthey, for the appellant.
928
S. T. Desai, T. A. Ramachandran, J. B. Dadachanji, for the
respondent.
The Judgment Of SUBBA RAO and SIKRI, JJ. was delivered by
SUBBA RAO, J. SHAH J. delivered a dissenting opinion.
Subba Rao, J. These appeals raise the question of construc-
tion of the provisions of the Taxation Laws (Part B States)
(Removal of Difficulties) Order, 1950, hereinafter called
the Order, in the matter of computation of the aggregate
depreciation allowances for the purpose of assessment to
tax.
Nandlal Bhandari Mills Ltd., is a public company incorpo-
rated in Indore under the Indore Companies Act, 1914. It
owns and runs a textile mill and some ginning factories.
The Income-tax Officer assessed the Company for the
assessment years 1950-51, 1951-52, 1952-53 and 1953-54 on
its income of the corresponding accounting years.’ being the
calendar years 1949, 1950, 1951 and 1952. In the course of
the assessments it became necessary to ascertain the
written-down value of the building, machinery, plant etc. of
the respondent company as on January 1, 1949. On April 1,
1950, the Indian Income-tax Act, 1922, was extended to Part
B States, including Madhya Bharat of which Indore became a
part. Till the said date, the assessee was for many years
assessed in the Companies Circle, Bombay, as a non-resident
and for some years as a resident under the Indian Income-tax
Act, 1922. It was also assessed to Industrial Tax under the
Indore Industrial Tax Rules, 1927. For those years in which
it was assessed as a non-resident under the Indian Income-
tax Act, 1922, only that part of its profits which could be
said to be attributable to the sale proceeds of goods
received in British India or in regard to which contracts
were accepted in British India was brought to tax. After
the Indian Income-tax Act was extended to Indore, diffi-
culties arose in the matter of fixing depreciation
allowances, for the rates obtaining under the Indian Income-
tax Act and those obtaining under the Indore Industrial Tax
Rules, 1927, were not the same. After the merger of the
State in the Indian Union, in order to rationalize the tax
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structure, the Central Government in exercise of the power
conferred on it under s. 12 of the Finance Act, 1950, issued
the Order where under in the case of such disparity the
greater of the two sums allowable was directed to be
adopted. During the assessment years, pursuant to the terms
of that Order, the Income-tax Officer took into account the
depreciation allowances for the years up to and including
1944 as computed under the Indian Income-tax Act, 1922, and
for the
929
subsequent years 1945 to 1948, the depreciation allowance as
computed under the Indore Industrial Tax Rules, 1927. On
that basis he arrived at the written-down value of the
building, plant, machinery etc. of the assessee as on
January 1, 1949. On appeals, the Appellate Assistant
Commissioner and, on further appeals, the Appellate
Tribunal, confirmed the orders of the Income-tax Officer.
At the instance of the assessee, the following questions,
among others, were referred to the High Court of Madhya
Pradesh, Jabalpur:
(1) Whether the computation of the written-
down value of the assets of the applicant in
the light of the provisions of the Taxation
Laws (Part B States) (Removal of Difficulties)
Order, 1950, is legal and valid.
(2) Whether the provisions of the Taxation
Laws (Part B States) (Removal of Difficulties)
Order, 1950, and the subsequent modifications
thereof were valid in law in the light of the
provisions of the Indian Income-tax Act, 1922,
the Finance Act, 1950, and the Constitution of
India.
(3) Whether the Indore Industrial Tax Rules,
1927, could be regarded as rule or law of a
Part B State for the purpose of the said
Taxation Laws (Part B States) (Removal of
Difficulties) Order, 1950, and, if so, whether
the same are valid in law; and
(4) Whether the depreciation ’actually
allowed’ means the depreciation deducted in
arriving at the taxable income or in arriving
at the world income.
Before the High Court the third question was not pressed;
and the second question was concluded by the decision of
this Court in Commissioner of Income-tax, Hyderabad v. Dewan
Bahadur Ramgopal Mills Ltd.(1). The correctness of the
answers given by the High Court in respect of these two
questions is not questioned before us and, therefore,
nothing further need be said about them here.
Questions 1 and 4, in substance, form two parts of the same
question. On question 1, the High Court held that the
depreciation allowed for the years up to and including 1944
in the
(1) [1962] 2 S.C.R. 318: [1961] 41 I.T.R. 280.
930
assessments made in the taxable territories would be the
depreciation which was actually allowed against the taxable
income ,and not the depreciation computed against the total
world income. On the 4th question, it answered that the
depreciation actually allowed meant the depreciation
deducted in arriving at the taxable income. The present
appeals filed by the Revenue question the correctness of the
answers given by the High Court in regard to questions 1 and
4 referred to it.
Mr. A. V. Viswanatha Sastri, learned counsel for the Reve-
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nue, argued that the assessee was only entitled to
depreciation on the written-down value calculated after
deducting all the amounts of depreciation that had been
taken into consideration in determining the world income.
He argued that depreciation was allowed in respect of the
user of the assets in the business’. that the allowance did
not depend on the assessable income and that the High Court,
therefore, went wrong in striking a proportion on the basis
of a part of the income actually assessed under the Indian
Income-tax Act.
Mr. Desai, learned counsel for the assessee, contended that
no depreciation as such having been allowed for the years
upto and including 1944 as computed under the Indian Income-
tax Act, the original cost itself should be taken as the
written-down value of the assets. Alternatively, he argued
that in any event only that part of the depreciation which
had entered into the computation of income found liable to
income-tax under the Indian Income-tax Act, which income was
calculated on proportionate basis alone, should be deducted
from the original cost in determining the written-down value
under S. 10(5) (a) of the Indian Income-tax Act.
We shall deal with questions 1 and 4 together, as, as we
have indicated earlier, they are really parts of the same
question. The answer to the questions turns upon the
interpretation of the provisions of the Order. It is,
therefore, necessary to read the relevant provisions of the
Order.
Paragraph 2. Computation of aggregate
depreciation allowance and the written-down
value.-
In making any assessment under the Indian In-
come-tax Act, 1922, all depreciation actually
allowed under any laws or rules of a Part B
State relating to income-tax and super-tax, or
any law relating to tax, on profits of
business, shall be taken into account in
computing the aggregate depreciation allowance
refer-
931
red to in sub-clause (c) of the proviso to
clause (vi) of sub-section (2) and the
written-down value under clause (b) of sub-
section (5) of section 10 of the said Act :
Provided that where in respect of any asset,
depreciation has been allowed for any year,
both in the assessment made in the Part B
State and in the taxable territories, the
greater of the two sums allowed shall only be
taken into account.
Explanation.-For the purpose of this
paragraph, the expression "all depreciation
actually allowed under any laws or rules of a
Part B State" means and shall be deemed always
to have meant the aggregate allowance for
depreciation taken into account in computing
the written-down value under any laws or rules
of a Part B State or carried forward under the
said laws or rules.
After the Indian Income-tax Act, 1922, was extended to the
Indore State, difficulties arose in the matter of fixing the
allowances for depreciation. The rates of depreciation
under the Act and under the Order were not the same.
Paragraph 2 of the Order provides that in making an
assessment under the Act all depreciation allowances
actually allowed under the laws obtaining in the Part B
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State before the Act was extended to it shall be allowed.
The proviso thereto says that when there is a conflict
between the two rates, the greater of the two sums allowed
shall be taken into account. The Explanation to the section
defines the expression "all depreciation actually allowed
under any laws or rules of a Part B State" to mean the
aggregate allowances for depreciation taken into account in
computing the written-down value under the laws prevalent in
the Part B State or carried forward under the said laws or
rules. The argument turned upon the following expressions
in the said paragraph : "actually allowed" in the main part
of the paragraph; "allowed in the assessment" in the
proviso; and "taken into account in computing" in the
Explanation. It is true that decided cases have given a
very wide meaning to the word "assessment". It means some-
times "the computation of income"; sometimes, the determina-
tion of the amount of tax payable; and sometimes, the
procedure laid down in the Act for imposing liability upon
the taxpayer. The proviso used the word "assessment" both
with reference to Part B States and also with reference to
taxable territories. But we are really not concerned with
the shades of meaning the said
932
word bears under the Act. For the purpose of computing the
written-down value, the amount of depreciation allowed for
the purpose of the assessment is only relevant. The key to
the understanding of the paragraph is the expression
"allowed". The expression "actually allowed" in the main
paragraph, "allowed" in the proviso, and "taken into
account" in the Explanation mean the same thing. What the
Income-tax Officer has to take into consideration in
computing the written-down value is the depreciation
actually allowed under the Income-tax Act or the laws
obtaining in Part B States and adopt the greater of the two
sums so allowed under that head. It was conceded that the
rates under the Indian Income-tax Act were higher for some
years than those obtaining under the laws in force in the
Indore State. The question, therefore, is what was the
amount actually allowed to the assessee towards depreciation
under the Income tax Act- during the years up to and
inclusive of 1944. This would depend upon the provisions of
the Indian Income-tax Act.
Under s. 10(2) of the Indian Income-tax Act, profits or
gains ,of business shall be computed after making the
allowances enumerated therein. Under cl. (vi), 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 cases, to such percentage on the
written-down value thereof as may in any case or class of
cases be prescribed be allowed. Under s. 10(5) (b),
"writtendown value" means in the case of assets acquired
before the ’previous year’ the actual cost to the assessee
less the depreciation actually allowed to him under the Act.
Under the Indian Income-tax Act, income is to be charged to
tax without reference to diminution in the value of capital
or the wear and tear involved in the user of the assets; but
in respect of specified assets ’like building, machinery,
plant and furniture etc., the Act grants an allowance in the
manner prescribed thereunder. Depreciation allowance is in
respect of such assets as are used in the business and shall
be calculated on the written-down value, which means, in the
case of assets acquired in the previous year, the actual
cost to the assessee and, in the case of assets acquired
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before the previous year, the actual cost to the assessee
less all depreciation actually allowed to him under the Act.
The allowance towards depreciation is conditioned on the
user of the assets, wholly or in part, during the accounting
year and thus contributing to the earning of the income.
Though it is not unrelated to the profits, it does not
933
depend upon the increase or decrease in the earning capacity
of the assets, but is only linked up with physical
depreciation in their value. Even so, only the amount of
depreciation actually allowed can be deducted from the
original cost of the assets to ascertain the written-down
value. De hors such an allowance, it has no significance in
the income-tax law. So the question is, what was allowed as
depreciation by the income-tax authorities in the
computation of the taxable income upto and inclusive of the
year 1944 ? During the said years the assessee was taxed as
a non-resident on the income which fell under s. 4 (1) (a)
or under s. 4 (1) (c), read with s. 42 of the Indian Income-
tax Act. The assessee was only assessed during the said
years in respect of that part of its profits which could be
said to be attributable to the sale proceeds or goods
received in British India or in regard to which contracts
were accepted in British India. Such income was brought to
tax in terms of r. 33 of the Indian Income-tax Rules, 1922.
Under the said rule, if the actual amount of the income,
profits or gains accruing or arising to a non-resident
cannot be ascertained, the amount of such income, profits or
gains for the purposes of assessment to income-tax may be
calculated on such percentage of the turnover so accruing or
arising as the Income-tax Officer may consider to be
reasonable, or on an amount which bears the same proportion
to the total profits of the business of such person, such
profits being computed in accordance with the provisions of
the Indian Income-tax Act, as the receipts so accruing or
arising bear to the total receipts of the business, or in
such other manner as the Income-tax Officer may deem
suitable. Under this provision the Income-tax Officer could
proceed thereunder only if he could not ascertain the actual
amount of the income, profits or gains accruing or arising
to a non-resident. If he could not, he could adopt one or
other of the three methods mentioned in the rule to
ascertain the said income. Two of the said methods permit
the Income-tax Officer to make a reasonable or suitable
estimate of such income. But, under the third method, which
was adopted in the present case, the amount of such income
for the purpose of income-tax shall be calculated on an
amount which bears the same proportion to the total profits
of the business of such person as the receipts so accruing
or arising bears to the total receipts of the business. The
working out of this method may best be understood by an
illustration. Suppose the total profit of a business is Rs.
100/and the receipt in India is Rs. 25/-, i.e., the income
accrued in India is one-fourth of the total income. If a
sum of Rs. 51represents the depreciation of the assets used
in the business and
934
if this is allowed, the total income will be Rs. 95/-; and
one fourth of Rs.95/- is Rs. 23-75 : that is the income
accrued in India under this formula. In arriving at Rs.
23.75 as the income in India, only Rs. 1.25, which is one-
fourth of Rs. 51-, the total depreciation, is deducted from
Rs. 25/- towards the depreciation, that is to say, only.Rs.
1.25 is actually allowed towards depreciation. The same
illustration may also be put in another way. Rs. 25/- is
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the gross income accrued in India to a non-resident; Rs. 51-
is the value of the depreciation on the total assets. By
taking one-fourth of Rs. 51-, i.e., Rs. 1.25, we get at the
figure of Rs. 23.75, that is to say, only one-fourth of the
amount representing depreciation is allowed in ascertaining
the taxable income in India. It is, therefore, manifest
that the Income-tax Officer, who applied the formula laid
down in r. 33 of the Income-tax Rules, 1922, in fixing the
depreciation allowance, had actually allowed only a fraction
of the amount towards depreciation allowable in assessing
the world income of the assessee.
But the learned counsel for the Revenue contended that the
entire depreciation of the assets was taken into
consideration in computing the taxable income and,
therefore, the entire amount should have been taken into
account by the Income-tax Officer in arriving at the
written-down value of the assets. It appears that the
Income-tax Officer in assessing the non-resident upto 1944
had, in calculating the total world income of the assessee.
allowed the entire amount of depreciation; thereafter, he
arrived at the taxable income in India by the application of
r. 33. As we have pointed out, the mere fact that in the
matter of calculation the total amount of depreciation was
first deducted from the world income and thereafter the
proportion was struck in terms of r. 33 does not amount to
an actual allowance of the entire depreciation in
ascertaining the taxable income accrued in India. The
Income-tax Officer, as we have pointed out earlier. could
have adopted a different method by first ascertaining the
gross income accrued in India and then deducting from it the
allowance under the Act proportionate to the said income.
Whatever method was adopted, only a fraction of the total
depreciation was actually allowed in ascertaining the
taxable income in India.
Learned counsel for the assessee contended that under the
method adopted in terms of r. 33 of the Income-tax Rules,
1922, no depreciation was allowed at all in ascertaining the
taxable income in India, for that was only taken into
consideration in arriving at the total world income.
935
We cannot accept this argument-we may say that the learned
counsel did not press this point seriously either. As we
have indicated earlier, only a fraction of the amount of
depreciation was actually allowed in the assessment of the
income accrued in India. We do not propose to express any
opinion on the question whether, if the other methods
suggested in r. 33 of the Rules were adopted, it could be
held that no depreciation was actually allowed in making the
assessment.
Our conclusion finds support in the judgment of the Bombay
High Court in Hakumchand Mills Ltd. v. Commissioner of
Income-tax (Central), Bombay(1). We endorse the view
expressed therein.
In the result, we hold that the High Court has given correct
answers to questions 1 and 4 referred to it. The appeals
fail and are dismissed with costs.
Shah, J. The respondent, a public limited company was
incorporated in the former Indian State of Indore. The Com-
pany was being assessed to pay income-tax in the Indore
State under the Indore Industrial Tax Rules, 1927, on
profits earned in its business of manufacturing cotton
textiles. In assessing tax under the Industrial Tax Rules
the Tax Officer of the Indore State allowed depreciation on
the assets at rates prescribed by the Industrial Tax Rules.
The Company was also assessed to tax in British India under
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the Indian Income-tax Act, 1922, for some years as a
resident and in others as a non-resident. The State of
Indore became a part of the United States of Gwalior, Indore
and Malwa in May, 1948, and the United States of Gwalior,
Indore and Malwa became on January 26, 1950 a constituent
State in the Indian Union as part of the Part B State of
Madhya Bharat.
The Finance Act, 1950 by s. 13 repealed the Taxation Laws in
force in the territories of the Part ’B’ States. In
proceedings for assessment under the Indian Income-tax Act
for the assessment years 1950-51, 1951-52, 1952-53 and 1953-
54, the Income-tax Officer worked out the written-down value
of the buildings, plant and machinery of the Company on
January 1, 1949 by taking into account the depreciation
allowed under the Indian Income-tax Act, 1922, till January
1, 1945, and thereafter the depreciation allowed under the
Indore Industrial Tax Rules, and assessed tax on that
footing. The order of the Income-tax
(1) [1963]47 I.T.R. 949.
Sup. CI./66 13
936
Officer was confirmed by the Appellate Assistant
Commissioner and the Income-tax Appellate Tribunal.
The Tribunal referred under S. 66(1) of the Indian Income-
tax Act four questions to the High Court of Madhya Pradesh
at Jabalpur. The High Court did not answer questions Nos. 2
& 3, because one of the questions in view of the judgment of
this Court Commissioner of Income-tax v. Dewan Bahadur Ram-
gopal Mills(1) did not require consideration, and the other
was not canvassed. The two other questions are :
.lm15
" (1) Whether the computation of the written-down value of
the assets of the applicant in the light of the provisions
of Taxation Laws (Part B States) (Removal of Difficulties)
Order, 1950 is legal and valid ?
(4)Whether the depreciation ’actually allowed’ means the
depreciation deducted in arriving at the taxable income or
in arriving at the world income ?"
The High Court recorded on the first question the answer
that depreciation allowed in the years up to and inclusive
of the year 1944 in the assessment made in the taxable
territories would be the. depreciation which was actually
allowed against the total income and not the depreciation
computed against the total world income, and on the fourth
question that the depreciation ’actually allowed’ means
depreciation deducted in arriving at the taxable income.
With certificate granted by the High Court, this appeal has
been preferred.
Under the Indore Industrial Tax Rules, 1927, depreciation
,was allowed at certain rates in respect of buildings, plant
and machinery. By s. 10(2) (vi) of the Indian Income-tax
Act in computing profits or gains of a business,
depreciation allowable in respect of buildings, machinery,
plant and furniture used for the purpose of business being
the property of the assessee, is 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, at such percentage on the, written-down value
thereof as may in any case or class of cases be prescribed.
By sub-s. (5) of S. 10, written-down value in sub-s. (2) is
defined. By virtue of S. 4A(c) a company is regarded as
resident in the taxable territories in any year (i) if the
control and management of its affairs is situated wholly in
the taxable territories in that year, or (ii) if its income
arising in the taxable territories
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(1) [1962] 2 S.C.R. 318 :41 I.T.R. 280
937
in that year exceeds its income arising without the taxable
territories in that year.
Control and management of the affairs of the Company was at
all material times situated at Indore, but in the years in
which its British Indian income exceeded the income without
British India, the Company was treated as resident for the
purpose of the Indian Income-tax Act, and in the other years
it was treated as non-resident. In assessing income of the
Company under the Indian Income-tax Act in the years before
1950, the Income-tax Officer had, whether the Company was
assessed as resident or non-resident, to ascertain its world
income, and for that purpose to take into account the
depreciation allowable under S. 10(2) (vi) read with s. 10
(5) (b). Depreciation allowance in respect of the profits
of the Company was therefore computed before the Indian
Income-tax Act, 1922, was made applicable to the territory
of the State of Indore by the Finance Act, 1950, under two
different statutes-the Indian Income-tax Act, and the Indore
Industrial Tax Rules, and in the assessment year 1950-51
there were two different sets of written-down values of the
buildings, plant and machinery of the Company.
To remove anomalies arising from the application of the
Income-tax Act in the computation of taxable income of
assessees from the Part B States, the Central Government
issued under s. 12 of the Finance Act, 1950, the Taxation
Laws (Part B States) (Removal of Difficulties) Order, 1950.
Paragraph 2 of that Order as originally promulgated read as
follows :
"In making any assessment under the Indian
Income-tax Act, 1922, all depreciation
actually allowed under any laws or rules of a
Part B State relating to income-tax and super-
tax, or any law relating to tax on profits of
business, shall be taken into account in
computing the aggregate depreciation allowance
referred to in sub-clause (c) of the proviso
to clause (vi) of sub-section (2) and the
written-down value under clause (b) of sub-
section (5) of section 10 of the said Act :
Provided that where in respect of any asset,
depreciation has been allowed for any year
both in the assessment made in the Part B
State and in the taxable territories, ’the
greater of the two sums allowed shalt only be
taken into account."
938
But the expression "all depreciation actually allowed under
any laws or rules of a Part B State" in paragraph 2 was
ambiguous. The Central Government purported to issue a
notification under s. 60A of the Indian Income-tax Act
incorporating an Explanation to paragraph 2, but the
notification was declared by the High Court of Hyderabad as
invalid: S. V. Naik v. Commissioner of Income-tax,
Hyderabad(1). ’thereafter, the Central Government issued an
amendment to the Order in exercise of the powers under s. 12
of the Finance Act, 1950, and incorporated an Explanation
with retrospective operation. The Explanation which became
effective from May 8, 1956, provided :
"For the purpose of this paragraph, the
expression "all depreciation actually allowed
under any laws or rules of a Part B State"
means and shall be deemed always to have meant
the aggregate allowance for depreciation taken
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into account in computing the written-down
value under any laws or rules of a Part B
State or carried forward under the said laws
or rules."
By the Explanation it was sought to evolve a method of
calculation of depreciation under the law or rules in force
in a Part ’B’ State : it was in effect a definition clause.
Therefore if before the application of the Income-tax Act,
an assessee in a Part ’B’ State was being assessed to tax
only under a State law, depreciation actually allowed had to
be taken into account for ascertaining the written-down
value of buildings, plant and machinery in the assessment
year 1949-50 : if he was assessed under the Indian Income-
tax Act as well as the State law, in determining the
appropriate written-down value, the proviso to paragraph 2
had to be applied, and depreciation actually allowed under
the State law had to be compared with the depreciation
actually allowed under the Indian Income-tax Act. The
expressions "depreciation actually allowed under any law or
rule of a Part B State" in the first clause, and the
expressions "depreciation has been allowed . in the
assessment in the Part B State" in the proviso have in
relation to any year of assessment the same connotation.
That is common ground. The point in dispute is about the
true import of the expression "depreciation . . . allowed
for any year . . . in the taxable territories". The normal
scheme of depreciation under the income-tax Act is that
depreciation progressively decreases every year, being a
percentage of the written down value, which in the first
year is the actual cost to the
(1) 20 I.T.R,206-
939
assessee, and in the years following the actual cost less
all depreciation allowed under the Income-tax Act, 1922 or
any Act repealed thereby : see S. 10(5) (b). The Indore
Industrial Tax Rules were, however, repealed by the Finance
Act, 1950 and not by the Income-tax Act, and the definition
of written-down value on S. 10(5) (b) was in terms
inapplicable, and depreciation had to be calculated under
the special machinery prescribed by ’the proviso to
paragraph 2 of the Taxation Laws (Part B States) Removal of
Difficulties) Order, 1950, when assessment of income had
been made both under the State law and the Indian income-tax
Act, 1922.
In determining the written-down value of the buildings,
plant and machinery of the Company, the Appellate Tribunal
held that the expression "actually allowed" in paragraph 2
means depreciation which is availed of for the purpose of
assessment of tax, and not merely a fraction of the total
depreciation allowance taken into account in levying charge
upon a part of the taxable income at a rate determined by
the total world income. That is stated in paragraph 10 of
the judgment of the Tribunal :
"The last contention of the assessee is that
the Income-tax Officer should not have taken
the full depreciation availed of in the
preceding years, but that the depreciation
should be apportioned in the same manner as
the income brought to assessment. The
deduction should only be made in respect of
that depreciation which can reasonably be
attributable to the Indian income. We think
that the law does not make any distinction as
to the part of income which was brought to
assessment under the Indian Income-tax Act.
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If depreciation has in fact been availed of by
the assessee either under the Indian Income-
tax Act or under the Industrial Rules of the
State deduction has to be made."
The High Court did not accept this view. They observed in
paragraph-8 of their judgment
".......the depreciation in respect of an
asset under the Indian Income-tax Act would
clearly be the ’one actually allowed as laid
down in Section 10 (5) (b) and the
depreciation under the Part B State’s law
would also be the one actually allowed as
provided in the substantive part of paragraph
2. It follows, therefore, that under the
proviso it is the greater of the two
940
depreciation allowances actually allowed that
has to be taken into account in computing the
written down value under section 10(5) (b).
The word "allowed" used in the proviso thus
takes its colour from the expression "all
depreciation actually allowed to him under
this Act" as used in Section 10(5) (b) and the
words "all depreciation actually allowed under
any laws or rules of a Part B State" used in
paragraph 2. The "Appellate Assistant
Commissioner and the Tribunal adopted this
construction of the word "allowed" as used in
the proviso; but inconsistently with this they
held that the words "in the assessment made"
used in the proviso indicated that it was the
greater of the depreciation not actually
allowed but taken into account against the
total world income that was to be taken into
account in computing the written-down value
under section 10(5)(b) after 1950. We are
unable to agree with this view. The proviso
has to be read with the substantive part of
paragraph 2 and section 10(5)(b) and is
concerned only with laying down the rule that
the greater of the two depreciation allowances
shall be taken into account."
Under S. 10 of the Income-tax Act taxable profits or gains
earned by an assessee under the head "business" after making
appropriate allowances under sub-s. (2) have to be computed.
One of such allowances is depreciation in respect of
buildings, machinery, plant and furniture being the property
of the assessee and used for the purpose of the business, at
such percentage on the original cost thereof to the assessee
or such percentage on the written-down value thereof as may
in any case or class of cases be prescribed. The view which
has appealed to the High Court is that even though in
determining the rate at which Lax was to be charged in
respect of the income of the company as resident (subject to
the deductions permissible under s. 14(2) (c) or as a non-
resident, the entire depreciation at rates applicable under
the Indian Income-tax Act had to be taken into account,
depreciation allowed in the taxable territories within the
meaning of the proviso meant only the fraction of the total
amount of depreciation calculated in determining the income,
equal to the fraction which the income taxable under the
Indian Income-tax Act bore to the total income of the
Company. But depreciation determined according to the rules
merely enters into the computation of taxable profits,
whether the assessee is a
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941
resident or a non-resident. In the assessment of a Company
the same rates of tax apply under the Indian Income-tax Act,
whether the Company is resident or non-resident. If the
Company is resident under s. 4A(c) its entire world income
would be chargeable, subject of course to special exemptions
like those provided by s. 14 (2) (c) : if it is non-resident
only a slice of that income would be chargeable. In
determining the chargeable income from business, profession
or vocation and the rate applicable thereto, the same rules
apply, whether the Company is taxed as resident or
nonresident. Under the scheme of the Income-tax Act
depreciation like any other allowance has to be allowed in
computing the total profit : after the total profit is
determined depreciation does not survive as a separate head
of allowance. A part only of the total profit of a Company
determined in the manner prescribed by s. 10 may, for
reasons already mentioned, be taxable. But total profit
being determined after depreciation is allowed, between the
taxable profits-which may be a fraction of the total
profits-and depreciation there is no definable relations
Therefore it is wrong to presume that the depreciation
allowed in the taxable territories, which is to be taken
into account under the proviso to paragraph 2 of the Removal
of Difficulties Order is only a fraction of the depreciation
considered for computing total profit.
The view which prevailed with the Tribunal that in deter-
mining the depreciation allowed within the meaning of the
proviso, it is wholly immaterial that a part of the total
income was chargeable to tax "if depreciation has in fact
been availed of by the assessee", is in my judgment correct.
Reliance was sought to be placed upon r. 33 of the Indian
Income-tax Rules, by counsel for the Company in support of
his plea. The material part of the Rule is :
"In any case in which the Income-tax Officer
is of opinion that the, actual amount of the
income, profits or gains accruing or arising
to any person residing out of the taxable
territories whether directly or indirectly....
in the taxable territories...... cannot be
ascertained, the amount of such income,
profits or gains for the purposes of
assessment to income-tax may be calculated on
such percentage of the turnover so accruing or
arising as the Income-tax Officer may consider
to be reasonable, or on an amount which bears
the same proportion to the total profits of
the business of such
942
person (such profits being computed in
accordance with the provisions of the Indian
Income-tax Act) as the receipts so accruing or
arising bear to the total receipts of the
business, or in such other manner as the
Income-tax Officer may deem suitable."
The rule in terms applies only when the Income-tax Officer
cannot ascertain the actual income, profits or gains
accruing or arising to any person residing outside the
taxable territories. Where from the evidence actual income
can be determined the rule has no application. Again the
rule contemplates the computation of income of a non-
resident in three different ways : (1) on such percentage of
the turnover so accruing or arising as the Income-tax
Officer may consider to be reasonable; (2) on an amount
which bears the same proportion to the total profits of the
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business of such person as the receipts so accruing or
arising bear to the total receipts of the business (such
profit being computed in accordance with the provisions of
the Indian Income-tax Act); and (3) in such other manner as
the Income-tax Officer may deem suitable.
In the computation of income of a non-resident by the second
method it may be necessary to determine and allow deprecia-
tion. When the first or the third method is resorted to,
determination of depreciation would normally be out of
place, because by the first method the income is taken as a
percentage of the turnover accruing or arising, and by the
third method taxable income may be determined in such other
manner as the Income-tax Officer deems suitable. Paragraph
2 of the Taxation Laws (Part B States) (Removal of
Difficulties) Order, 1950, applies only to cases in which in
making an assessment under the Indian Income-tax Act
depreciation allowed has to be taken into account in
computing the total profits or income. Where the question
of considering the depreciation allowed does not arise,
because in the method adopted determination of depreciation
does not enter, paragraph 2 of necessity would have no
application. What must, however, be noticed is that in the
ascertainment of total profits, either for the purposes of
assessment in the ordinary manner when the income of the
assessee is determinable, or where a fraction is to be
adopted for the purpose of the second method contemplated by
r. 33, there is no scope for assuming that only a fraction
of the depreciation is actually allowed. Depreciation is
deducted once and for all, and it is deducted in determining
the total profits of the business.
943
There is therefore no warrant either in s. 10(2) (vi) or in
paragraph 2 of the Taxation Laws (Part B States) (Removal of
Difficulties) Order, 1950, or in r. 33 framed under the
Indian Income-tax Act, for the view that depreciation
allowed is a fraction of the total depreciation of the
business. I am unable to agree with the view taken by the
High Court that in determining the appropriate written-down
value, by the application of the rule contained in the
proviso to paragraph 2, only a fraction of the depreciation
allowed in assessments made under the Indian Income-tax Act,
should be taken into account.
I record an answer on the first question in the affirmative,
and on the fourth question that the depreciation actually
allowed means the depreciation taken into account in
arriving at the total or world income.
ORDER
In accordance with the opinion of the majority, the appeals
are dismissed with costs.
944