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 IT 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 section 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 appellant  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 section 60A of the Indian Income Tax Act 1922 hereinafter 861 referred to as the Act and section 23A of the Business Profits Tax Act 1947
Para 15 of the said order provides as follows  151 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
Status ie whether public or private company firm individual or Hindu undivided family
Nature of business
Date of commencement of the business
Nature of the concessions granted
Period for which concessions granted
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 section 105b 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 machinery
Mr Sastri the learned counsel for the appellant first urges that on a proper interpretation of section 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 vs Messrs Straw Products Limited Bhopal1 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 section 105 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 section 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 section 10 5 b of the Act unaffected by the amendment made by the 1962 Order
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 costs
Appeal dismissed


Summary:
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 Incometax 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 section 105b 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 section 105b 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 vs Ms Straw Products Limited Bhopal 1966 SCR applied
ii The exemption granted to the company under para
15 of the Merged States Taxation Concession Order 1949 was an exemption under section 60A of the Income tax Act and not under any agreement
The case of the assessee had therefore to be determined with reference to section 105b of the Act unaffected by the amendment made by the 1962 Order
862 G