Case: Commissioner Of Income-Tax, Madhya Pradesh Vs. M/S. Nandlal Bhandari Mills Ltd

Subba Rao, J. (For himself and Sikri J.) 1. 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. 2. 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 year upto and including 1944 as computed under the Indian Income-tax Act, 1922, and for the 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 (Para 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 Commr. of Income-tax Hyderabad v. Dewan Bahadur Ramgopal Mills Ltd., (1961) 41 ITR 280 : (AIR 1961 SC 338 ). 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. 3. 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 upto and including 1944 in the 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. 4. 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. 5. 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. 6. We shall deal with questions 1 and 4 together, 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. 7. 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 deprecation 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 S. 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 rats 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 allowance actually allowed under 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 tax-payer. 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 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 upto and inclusive of 1944. This would depend upon the provisions of the Indian Income-tax Act. 8. 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 were 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 costs 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 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(6) (a) or under S. 4(1)(c), read with S. 42 of the Indian Income-tax Act. The assessee was only assessed during the said years in respect of that part of its profits which could be said to be attributable to the sale proceeds or goods received in British India or in regard to which contracts were accepted in British India. Such income was brought to tax in terms of R. 33 of the Indian Income-tax Rules, 1922. Under the said rule, if the actual amount of the income, profits or gains accruing or arising to a non-resident cannot be ascertained, the amount of such income, profits or gains for the purposes of assessment to income-tax may be calculated on such percentage of the turnover so accruing or arising as the Income-tax Officer may consider to be reasonable, or on an amount which bears the same proportion to the total profits of the business of such person, such profits being computed in accordance with the provisions of the Indian Income-tax Act, as the receipts so accruing or arising bear to the total receipts of the business, or in such other manner as the Income-tax Officer may deem suitable. Under this provision, the Income-tax Officer could proceed thereunder only if he could not ascertain the actual amount of the income, profits or gains accruing or arising to a non-resident. If he could not, he could adopt one or other of the rule to three methods mentioned in the 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 Indian is one-fourth of the total income. If a sum of Rs. 5 represents the depreciation of the assets used in the business and if this is allowed, the total income will be Rs. 95, and one-fourth of Rs. 95 is Rs. 23.75 that is the income accrued in India under this formula. In arriving at Rs. 23.75 as the income in India only Rs. 1.25, which is one-fourth of Rs. 5, 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. 5 is the value of the depreciation on the total assets. By taking one-fourth of Rs. 5, 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 accorded 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. 9. 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 nonresident 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. 10. 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. 11. 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. 12. Our conclusion finds support in the judgment of the Bombay High Court in Hakumchand Mills Ltd. v. Commr. of Income-tax (Central), Bombay, (1963) 47 ITR 949 (Bom) . We endorse the view expressed therein.

Decision reasoning: 1[ds]But we are really not concerned with the shades of meaning the said word bears under the Act. For the purpose of computing then value, the amount of depreciation allowed for the purpose of the assessment is only relevantThough 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 the amount of depreciation actually allowed can be deducted from the original cost of the assets to ascertain then value. De hors such an allowance, it has no significance in theIt is, therefore, manifest that thex Officer, who applied the formula laid down in R. 33 of thex 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 assesseeIt appears that thex Officer in assessing thenonresidentupto 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. Thex 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 India11. We cannot accept this argumentwe 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 assessment12. Our conclusion finds support in the judgment of the Bombay High Court in Hakumchand Mills Ltd. v. Commr. ofx (Central), Bombay, (1963) 47 ITR 949 (Bom)  . We endorse the view expressed therein