Case: Mahadeva Upendra Sinai Etc Vs. Union of India &amp; Others

mechanism provided in that Act. After the promulgation of the 1950 Order, the only difficulty that remained was caused by the different rates at which depreciation had actually been taken into account and allowed under the Hyderabad Income-tax Act. The Explanation added by the 1956 Order, in effect, did no more than explaining that in paragraph 2 of 1950 Order, "all depreciation actually taken into account by the Income-tax Officer in computing the written down value under the Hyderabad Income-tax Act means " all depreciation actually allowed."60. As has been said already and it needs to be said again, the words "depreciation actually allowed" in Section 43 (6) (b) connote depreciation that has actually been taken into account and given effect to by the Income-tax authorities in the computation of the profits and gains of the business in assessing income-tax for earlier years. The said Explanation did not change that basic connotation, it only clarified it. Thus, in issuing the 1950 Order and the 1956 Order, adding the Explanation, the Central Government in that case, did not over-step the limits of the power delegated to it under Section 12 of the Finance Act, 1950. The impugned provision in the D. B. Ram Gopal Mills case (1961) a SCR 318 = (AIR 1961 SC 338 ) (supra) corresponds to clause (2) and Explanation (a) thereto of the 1949 Order and the substantive part of clause (3) of the 1970 Order; it is not analogous to the impugned Proviso in the instant case.61. The situation before us is materially different. Here, no depreciation was ever computed or actually allowed to the assessees under the Portuguese Law. Indeed, under that law the tax was levied not on net income but on gross turnover of the business. There was, strictly speaking, no assessment of tax on real "profits and gains" of a business, the tax being levied on gross receipts on ad hoc basis. Allowing or taking into account depreciation of assets was out of question in that process of assessment. In the case in hand, the impugned Proviso seeks to introduce a new concept of calculating depreciation. By replacing "depreciation actually allowed" with "depreciation deemed to have been allowed" by a fiction of law, even where no depreciation was at all allowed under any law outside the taxation territories, it, in effect, attempts to change the fundamental scheme of the Act.62. D. B. Ramgopal Mills case (1961) 2 SCR SIB = (AIR 1961 SC 338 ) (supra) was noticed, explained and distinguished in Straw Products Ltds case (1968) 2 SCR 1 = (AIR 1968 SC 579 ) (supra). It was observed that the former did not support the view that the arising of a difficulty is a matter for the subjective satisfaction of the Central Government. The precedent case is not in pari materia with D. B. Ram Gopal Mills case. It is in line with (1968) 2 SCR 1 = (AIR 1968 SC 579 ) and the ratio of the latter decision and the observations made therein with regard to the then impugned Order of l962 apply with full force to the impugned Proviso in the instant case.63. In the light of what has been said above, we accept contention (1) and (2) advanced on behalf of the petitioners.64. Be that as it may, the last contention canvassed by Mr. Palkhiwala is a clincher. The argument is that the impugned Proviso is not workable, because under the Portuguese law there was no tax on income at all. These, Territories were merged with India on December19.1961 and the Indian Income-tax Act was extended to these Territories from April 1, 1963. During this interregnum, it is contended, there was no law either Portuguese or Indian, under which the income of those prior years could be computed. If there is a loss, or profit is inadequate to absorb the depreciation, the latter can be carried forward without limit of time. Owing to the absence of any tax law during the aforesaid interregnum, proceeds the argument, the petitioners would not have the benefit of "carry-forward" of depreciation from any year prior to l963, and, thus, the impugned Proviso instead of removing any difficulty, would create serious difficulties and legal complications.65. There is a good deal of force in this contention.66. It has been noticed earlier that the tax imposed under the Portuguese law was, in reality, a turn-over tax and not a tax on the income of a business. The levy was exacted on gross receipts, irrespective of loss or profit. Thereafter, during the interregnum between December 19, 1961 and April 1, 1963, there was in force no law authorising the levy of income-tax in these Territories. We have also seen that under the Act an assessee is entitled to carry-forward unabsorbed depreciation in case of loss or inadequate profits without any time-limit (Section 32 (2)). For ensuring this right to an assessee, assessments for ascertaining losses or insufficiency of profits of his business, since the acquisition and use of the assets by him will have to be made. In the Indian Income-tax Act as extended to these Union Territories, there is no provision for making assessment in respect of those past years. Therefore a Goa assessee who made losses and suffered depreciation of his assets will never get the benefit of such carry-forward, as no machinery exists for determining inadequacy of profits or the factum of losses in those years which is a condition precedent to carry forward of depreciation. Retrospective assessments for this purpose, going back to a period prior to 1963 could have been made, if at all, under a law made by Parliament and not under an executive fiat. In the absence of such law it is impossible to work the Proviso without riding roughshod over the rights of the assessees to have their unabsorbed depreciation relating to pre-1963 period, carried forward. Viewed from this angle, the impugned Proviso would, in the implementation of the Act, create difficulties rather than removing them.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]24. The pivot of the definition of written-down value" is the "actual cost" of the assets. Where the asset was acquired and also used for the business in the previous year, such value would be its full actual cost and depreciation for that year would be allowed at the prescribed rate on such cost. In subsequent year, depreciation would be calculated on the basis of actual cost less depreciation actually allowed. The key word in Cl. (b) is "actually." It is the anti-thesis of that which is merely speculative, theoretical or imaginary."Actually" contra-indicates a deeming construction of the word "allowed" which it qualifies. The connotation of the phrase "actually allowed" is thus limited to depreciationactually taken into account or granted and given effect to,i. e. debited by the Income-tax Officer against the incomings of the business in computing the taxable income of the assessee: it cannot be stretched to mean "notionally allowed" or merely allowable on a notional basis.25. Of course, any depreciation carried forward under Section 32 (2) is, in view of Explanation 3 to Section 43 (6) considered as depreciation "actually allowed." But such is not the case here.26. From the above conspectus, it is clear that the essence of the scheme of the Indian Income-tax Act is, that depreciation is allowed, year after year, on theactual costof the assets as reduced by depreciationactually allowedin earlier years. It follows, therefore, that even in the case of assets acquired before the previous year, where in the past no depreciation was computed, actually allowed or carried forward, for no fault of the assessee,the "written-down value" may under clause (b) of S. 43 (6), also, be the actual cost of the assets to the assessee.True, that under the income. tax law of the merged State, depreciation was allowable, and 1962 Order, Explanation (b) was intended to cover cases where no depreciation was actually allowed on account of the exemption of the assessee from tax under a State law or a rule or under an agreement with the Ruler of a merged State (whose word was law) whereas in the instant case depreciation was not allowed because it was not computed under the Portuguese Law. But this is a distinction without a difference.As noticed already, the Portuguese law was not a law imposing tax on net income. That law levied tax on gross-receipts and not on the profits and gains-of a business. It would not be wrong to say that before the merger, in these territories, there was no income tax in the sense the tax is understood under the Indian Income-tax Act. In principle, therefore, there would be no difference between a case where one person is exempted from income-tax under the law, and a case where all are exempted, there being no income-tax law.55. We are unable to accept the contention that but for the impugned Proviso, the provisions of Section 32 and Section 43 (6) (b) of the l961 Act on its extension to Goa, Daman and Diu could not be given effect to and applied to the assessees in those territories. There could be no difficulty in computing the written-down value of the assets that had been acquired by the petitioners before the previous year, under clause (b) of Section 43 (6). Since no depreciation was, in fact, allowed to the petitioners in the past under the Portuguese law in the first assessment under the Indian Income-tax Act, the written down value would, under this clause (b) work out to be the actual cost of the assets less nil. Thereafter, in each succeeding year the depreciation actually allowed in the preceding year would be deducted causing yearly diminution of the written down value with consequent decrease in the depreciation allowed on that basis. Exactly, this was the manner in which the written down value of the assets of the petitioners has been computed and depreciation allowed for several assessment years from l964-65 onwards. This itself demonstrates that there was no difficulty in applying the aforesaid provisions to the cases of these assessees.56. We find no merit in the argument that the impugned Proviso brings about equality of treatment among different assessees in India. The law on the point was declared by this Court in Straw Products Ltd.s case (1968) 2 SCR 1   = (AIR 1968 SC 579  ) about seven years back. If that decision did not correctly interpret the intendment of the Legislature, the Parliament would have nullified its effect by legislation. As a result, no assessee in the Territories of the erstwhile Part B States and merged States has suffered the disadvantage of depreciation being deducted on notional basis in determining the written down value, when in fact, no depreciation had been actually allowed under the former local laws. Similarly, no assessee in British India suffered such fictional deduction of depreciation when it had not been actually allowed earlier. The impugned Proviso, therefore, far from ensuring parity of treatment puts the assessee in these Union Territories in a rosy position than the assessees in the rest of India.The situation before us is materially different. Here, no depreciation was ever computed or actually allowed to the assessees under the Portuguese Law. Indeed, under that law the tax was levied not on net income but on gross turnover of the business. There was, strictly speaking, no assessment of tax on real "profits and gains" of a business, the tax being levied on gross receipts on ad hoc basis. Allowing or taking into account depreciation of assets was out of question in that process of assessment. In the case in hand, the impugned Proviso seeks to introduce a new concept of calculating depreciation. By replacing "depreciation actually allowed" with "depreciation deemed to have been allowed" by a fiction of law, even where no depreciation was at all allowed under any law outside the taxation territories, it, in effect, attempts to change the fundamental scheme of the Act.In the light of what has been said above, we accept contention (1) and (2) advanced on behalf of the petitioners.It has been noticed earlier that the tax imposed under the Portuguese law was, in reality, a turn-over tax and not a tax on the income of a business. The levy was exacted on gross receipts, irrespective of loss or profit. Thereafter, during the interregnum between December 19, 1961 and April 1, 1963, there was in force no law authorising the levy of income-tax in these Territories. We have also seen that under the Act an assessee is entitled to carry-forward unabsorbed depreciation in case of loss or inadequate profits without any time-limit (Section 32 (2)). For ensuring this right to an assessee, assessments for ascertaining losses or insufficiency of profits of his business, since the acquisition and use of the assets by him will have to be made. In the Indian Income-tax Act as extended to these Union Territories, there is no provision for making assessment in respect of those past years. Therefore a Goa assessee who made losses and suffered depreciation of his assets will never get the benefit of such carry-forward, as no machinery exists for determining inadequacy of profits or the factum of losses in those years which is a condition precedent to carry forward of depreciation. Retrospective assessments for this purpose, going back to a period prior to 1963 could have been made, if at all, under a law made by Parliament and not under an executive fiat. In the absence of such law it is impossible to work the Proviso without riding roughshod over the rights of the assessees to have their unabsorbed depreciation relating to pre-1963 period, carried forward. Viewed from this angle, the impugned Proviso would, in the implementation of the Act, create difficulties rather than removing them.