Commissioner of Income-Tax, Bombay Vs.
Dharampur Leather Cloth Co. Ltd., Bombay  INSC 275 (3 December 1965)
03/12/1965 SIKRI, S.M.
CITATION: 1966 AIR 1117 1966 SCR (2) 859
F 1968 SC 579 (12)
Indian Income-tax Act, 1922 s.
10(5)(b)-Depreciation 'actually allowed'-Whether includes depreciation that
might have been allowed if income had not been exempted.
Taxation Laws (Merged States) (Removal of
Difficulties) (Amendment) Order, 1962--Company exempted by Ruler of Indian
State from, taxation-After merger exemption given under para 15 of Merged
States (Taxation Concession) Order, 1949- Exemption by Commissioner whether a
continuation of the agreement with the Ruler.
The respondent company obtained under an
agreement with the Ruler of the erstwhile State of Dharampur an exemption from
levy of income-tax and super-tax for the first seven years of its working. it
commenced business in June 1949. In August 1949 the State of Dharampur merged
with the Province of Bombay. The company then applied for and obtained under
para 15 of the Merged States (Taxation Concession) Order, 1949, an exemption
from income-tax and supper-tax for five years commencing from April, 1950. In
the assessment year 1956-57 when the company was to be assessed under the
Indian Income tax Act, 1922, for the first time, it claimed that as no
depreciation had actually been allowed to it earlier the original cost of its
machinery etc. should be taken as the written down value for the purpose of
calculating the allowable depreciation. The assessing and appellate authorities
held against the company but the High Court held in its favour. In appeal to
this Court by the Revenue it was contended that (1) on a proper interpretation
of s. 10(5)(b) of the Indian Income-tax Act, 1922 the depreciation must be
deemed to, have been allowed to the assessee in the years in which its income
was exempted and (2) the concession given by the Commissioner must be deemed to
be a continuation of the agreement with the Ruler and therefore the Taxation
Laws (Merged States) (Removal of difficulties) Order 1949 as amended by the
Taxation Laws (Merged States) (Removal of Difficulties) (Amendment Order,),
1962 applied to the facts of the case.
HELD: (i) The words 'actually allowed' in s.
10(5)(b) did not include any notional allowance and the High Court had rightly
decided that the original cost was the written down value. [862 C] Commissioner
of Income-tax, Madhya Pradesh v. M/s. Straw Products Limited, Bhopal, 
(ii) The exemption granted to the company
under para. 15 of the Merged States (Taxation Concession) Order, 1949 was an
exemption under s. 60A of the Income-tax Act and not under any agreement. The
case of the assessee had therefore to be determined with reference to s.
10(5)(b) of the Act unaffected by the amendment made by the 1962 Order. [862 G]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 956 of 1964.
860 Appeal by special leave from the judgment
and order dated October 7, 9, 1961 of the Bombay High Court in I.T.
Reference No. 6 of 1960.
A. V. Viswanatha Sastri, Gopal Singh, B. R.
G. K. A char and R. N. Sachthey, for the appellant.
Mahinder Narain, Rameshwar Nath, S. N. Andley
and P. L.
Vohra, for the respondent.
The Judgment of the Court was delivered by
Sikri, J. This appeal by special leave is directed against the judgment of the
High Court of Judicature at Bombay answering the following question against the
"Whether depreciation is allowable on the
original cost of the various components of the Plant and Machinery and other
assets of the company as acquired and used prior to 1-7-1953 ?" The
relevant facts are these. We are concerned with the assessment year 1955-56
(accounting year being April 1, 1954 to March 31, 1955). The respondent,
Dharampur Leather Company Ltd., Bombay, hereinafter referred to as the assessee
company, was incorporated on June 15, 1943, as a private limited company, and
later on November 24, 1949, it became a public limited company. On August 1,
1949, the Dharampur State merged with the Province of Bombay. Before its
incorporation, the promoters of the assessee company had negotiated with the
Ruler of Dharampur and secured from the Ruler total exemption from the State
Income Tax of profits of the company for a period of seven years from the
commencement of its working. The factory commenced working from June 15, 1949.
After the merger the assessee company applied to the Commissioner of Income
Tax, Bombay, by its letter dated June 22, 1951, for relief under para 15 of the
Merged States (Taxation Concessions) Order, 1949. The Com- missioner of Income
Tax communicated the decision of the Government in his letter dated March 8,
1952, to exempt the company from income tax and super tax for a period of five
years with effect from April 1, 1950. It was, however, stated that the
shareholders of the company would be liable to pay tax on the amount of
dividend received by them.
The Merged States (Taxation Concessions)
Order, 1949, was issued by the Central Government in exercise of the powers
conferred by S. 60A of the Indian Income Tax Act, 1922, hereinafter 861
referred to as the Act, and s. 23A of the Business Profits Tax Act, 1947. Para
15 of the said order provides as follows :
"15(1) Where any industrial undertaking
situate in a merged State claims that it has been granted any exemption from or
concession in respect of income-=, super-tax or business profits tax by the
Ruler of the State before the 1st day of August, 1949, it shall submit an
application to the Commissioner of Income- tax giving the following particulars
:- 1. Name of the Industrial undertaking.
2. Status (i.e. whether public or private
company, firm, individual or Hindu undivided family).
3. Nature of business.
4. Date of commencement of the business.
5. Nature of the concessions granted.
6. Period for which concessions granted.
7. Unexpired period of the concessions from
the 1st day of August, 1949.
(2) The application shall be accompanied by a
copy of the orders of the State granting the concession or of the agreement
with the State.
(3) The Commissioner shall, after obtaining
such other information as he may require, forward the application to the
Central Government which, having regard to all the circumstances of the case,
may grant such relief, if any, as it thinks appropriate." The assessee
company contended before the Income Tax Officer in the course of the assessment
proceedings for the assess- ment year 1955-56 that this being the first
assessment year after it commenced working as a factory, no depreciation had in
fact been actually allowed to the assessee in any earlier assessment year, and,
therefore, the depreciation should be computed on the original cost of the
various items of plant and machinery and other assets of the company. The
Income Tax Officer, however, rejected this contention and held that
depreciation must be computed on the written-down values of machinery computed
as if the income of the assessee had been worked out properly in the years when
the company was exempted and the depreciation being allowed at the usual rates.
The assessee failed before the Appellate Assistant Commissioner and the
Appellate Tribunal. The Appellate Tribunal held that the words "actually
allowed" in s. 10(5)(b) 862 of the Act were wide enough to cover the case
of the assessee. The High Court, however, held that if in the prior years no
depreciation had been actually allowed then the actual cost incurred by the
assessee for acquiring the machinery would be the written down value of the
Mr. Sastri, the learned counsel for the
appellant, first urges that on a proper interpretation of S. 10 (5) (b) of the
Act, the depreciation must be deemed to have been allowed to the assessee in
the years in which the income of the assessee company was ,exempted. There is
no force in this contention. We have delivered judgment today in Commissioner
of Income Tax, Madhya Pradesh v. Messrs Straw Products Limited Bhopal(1) and
held that the words "actually allowed" in para 2 of the Taxation Laws
(Merged States) (Removal of Difficulties) Order, 1949, did not include any
notional allowance. Following that judgment, we must interpret the words
'actually allowed' occurring in s. 10(5) (b) of the Act in the same manner.
Mr. Sastri next contends that the Taxation
Laws (Merged States) (Removal of Difficulties) Order, 1949, as amended by the
Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order,
1962, hereinafter referred to as 1962 Order, applies to the facts of the case.
He says that the exemption was ,originally given by the Ruler of Dharampur
State under an agreement with the assessee company and the concession by the
Commissioner of Income Tax vide his letter dated March 8, 1952, was in fact a
continuance of the agreement, and therefore, this exemption must be deemed to
have been granted under an agreement with the Ruler, within the meaning of 1962
Order. We are unable to accede to this contention. In our opinion, the
Explanation inserted by 1962 Order has no bearing on the facts of this ,case.
The exemption granted by the Central Government is granted under para 15 of the
Merged States (Taxation Concessions) Order, 1949, which was itself issued under
s. 60A of the Act. The result is that the exemption was granted under the Act
and not under any agreement. The case of the assessee must be determined with
reference to s. 10 (5) (b) of the Act, unaffected by the amendment made by the
In the result we agree with the High Court
that the answer to the question referred to should be in the affirmative.
The :appeal fails and is dismissed with
(1)  2 S.C.R. 881.