Commissioner of Income-Tax, Madhya
Pradesh Vs. M/S. Nandlal Bhandari Mills Ltd. [1965] INSC 279 (7 December 1965)
07/12/1965 SUBBARAO, K.
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 nonresident
company in Part B States as well as in IndiaFraction of total world income
taken as Indian incomeDepreciation 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 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 sometimes
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 depreciationallowed 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 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 tax927 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] 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]
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 construction 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 incorporated 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, difficulties 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 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 Revenue, 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 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 refer931 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 subsection (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 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 sometimes "the computation of
income"; sometimes, the determination 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 wasthe 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), "written down
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 there under. 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 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 there under 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 onefourth 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 the gross income accrued in India to a non-resident; Rs. 51is
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 Company 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 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 195354, 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 Ramgopal 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 (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 subsection (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 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 Incometax 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,206939 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.
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 nonresident,
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 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 determining 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 nonresident
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 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
depreciation. 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.
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