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 section 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 structure the Central Government in exercise of the power conferred on it under section 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 vs Dewan Bahadur Ramgopal Mills Ltd1
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 1 930 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 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 section 105 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 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 section 102 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 section 105 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 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 section 4 1 a or under section 4 1 c read with section 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 100and the receipt in India is Rs 25  ie 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 Rs95 is Rs 23 75  that is the income accrued in India under this formula
In arriving at Rs 2375 as the income in India only Rs 125 which is one fourth of Rs 51  the total depreciation is deducted from Rs 25 towards the depreciation that is to say only
125 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 51 is the value of the depreciation on the total assets
By taking one fourth of Rs 51  ie Rs 125 we get at the figure of Rs 2375 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 vs Commissioner of Income tax Central Bombay1
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 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 section 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 196347 ITR 949
CI66 13 936 Officer was confirmed by the Appellate Assistant Commissioner and the Income tax Appellate Tribunal
The Tribunal referred under section 661 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 vs Dewan Bahadur Ram gopal Mills1 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  4Whether 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 section 102 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 section
5 of section 10 written down value in sub section
2 is defined
By virtue of section 4Ac 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 41 ITR 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 section 102 vi read with section 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 section 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 section 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 section V Naik vs Commissioner of Income tax Hyderabad1 thereafter the Central Government issued an amendment to the Order in exercise of the powers under section 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 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 1 939 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 section 105 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 section 105 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 105 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 105 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 105b 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 105b and is concerned only with laying down the rule that the greater of the two depreciation allowances shall be taken into account
 Under section 10 of the Income tax Act taxable profits or gains earned by an assessee under the head business after making appropriate allowances under sub section 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 section 142 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 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 section 4Ac its entire world income would be chargeable subject of course to special exemptions like those provided by section 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 section 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 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 section 102 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


Summary:
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 sections 41 a and 41c read with section 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 depreciation allowed for the purpose of the assessment only was relevant
931 G H 932 A iiThe 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 iiiUnder 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 H933 A B iv During the years up to and including 1944 the assessee was taxed as a nonresident on the income which fell under section 41a or unders
41c read with section 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 vs Commissioner of Income Central Bombay  endorsed
Per Shah J dissenting Under section 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 section 4Ac its entire world income would be chargeable subject of course to special exemptions like those provided in section 142c  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 section 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 section 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 section 102vi 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