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

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. Thex Officer assessed the Company for the assessment years3 and4 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 then value of the building, machinery, plant etc. of they as on January 1, 1949. On April 1, 1950, the Indianx 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 anonresidentand for some years as a resident under the Indianx 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 anonresidentunder the Indianx 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 Indianx Act was extended to Indore; difficulties arose in the matter of fixing depreciation allowances, for the rates obtainingunder the Indianx 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, thex Officer took into account the depreciation allowances for the year upto and including 1944 as computedunder the Indianx 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 then 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 thex 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 then 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 Indianx 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 incomeBefore the High Court the third question was not pressed; and the second question was concluded by the decision of this Court in Commr. ofx 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 here3. 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.

Reasoning: 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