Case: Straw Products Ltd Vs. Income-Tax Officer, Bhopal &amp; Ors

2. The assessee was incorporated in August, 1935 with its Head Office in the Indian State of Bhopal, and commenced business as a manufacturer of wrapping paper in 1939. The assessee entered into an agreement with the Ruler of Bhopal under which the assessee was exempted from payment of all taxes to the State for a period of ten years expiring on October 31, 1948.3. The State of Bhopal merged with India on August 1, 1949. The territory was constituted into a Chief Commissioners Province, and was later merged with the State of Madhya Pradesh under the States Reorganization Act, 1956. The Governor-General of India issued the "Taxation Laws (Extension to Merged States) Ordinance" 21 of 1949 to make certain taxation laws applicable to the merged States. By C1. 3 of the Ordinance, amongst other Acts, the Indian Income-tax Act, 1922 and all the orders and rules issued thereunder were extended to the merged States, and by Cl. 7 the corresponding laws in force in the merged States were repealed. By Cl. 8 the Central Government was invested with the power to make provisions or give directions, which appeared to the Government to be necessary, for removing any difficulty arising in giving effect to the provisions of the Ordinance.4. Ordinance 21 of 1949 was repealed and replaced by the "Taxation Laws (Extension to Merged States and Amendment) Act" 67 of 1949. Section 3 of the Act extended with effect from April 1, 1949, to the merged States, amongst other Acts, the Indian Income-tax Act and the orders and rules made thereunder, and by S. 7 the laws in force in the merged States corresponding to the Acts mentioned in S. 3 stood repealed.The taxation laws in the merged State were not repealed by the Indian Income-tax Act: they stood repealed by the Taxation Laws Extension to Merged States and Amendment) Act 67 of 1949. In the application of the scheme of the Income-tax Act 1922 for computing the depreciation allowance difficulties clearly arose. On the plain words of the Income-tax Act in the computation of the taxable income of an assessee the depreciation actually allowed under the Act, or Acts repealed thereby or under executive orders issued under the Indian Income-tax Act, 1886, could alone be taken into account: depreciation allowed under the State laws could not be taken into account. The Central Government therefore in exercise of its authority under cl. 8 of Ordinance 21 of 1949 issued the "Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949." By Cl. 2 of that Order, it was providedmaking any assessment under the Indian Income-tax Act, 1922, all depreciation actually allowed under any laws or rules of a merged State relating to income-tax and super-tax, 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 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 merged State and in British India, the greater of the two sums allowed shall only be taken into account.Ordinance 21 of 1949 was repealed by sub-s. (1) of S. 34 of the Taxation Laws (Extension to Merged States and Amendment) Act 67 of 1949 but by virtue of sub-s. (2) of that Section, the Removal of Difficulties Order remained in force. The Order was clearly intended to provide that depreciation "actually allowed" under the Merged State Acts was to be taken into account for determining the written down value of assets of an assessee in bringing into effect the Indian Income-tax Act to the assessees in the merged States. In computing the profits and gains of the business carried on by the assessee for determining the tax payable by him for the assessment year 1949-50,depreciation allowed under S. 10 (2) (vi) was taken as a percentage of the original cost to the assessee of the buildings, machinery, plant and furniture, and in the four subsequent assessment years the written down value of the assets admissible for depreciation was determined on that footing. The Income-tax Officer, Bhopal thereafter commenced proceedings for re-assessment under S. 34 (1) (b) of the Indian Income-tax Act, 1922, against the assessee in respect of the assessment years 1952-53 and 1953-54 and by order dated March 3, 1958, recomputed the taxable income on the footing that since the commencement of the business the assessee must be deemed notionally to have been allowed depreciation under the Bhopal Income-tax Act. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal disagreed with the Income-tax Officer and restored the original assessment. On a reference made by the Appellate Tribunal, the High Court of Madhya Pradesh held in favour of the assessee.9. During the pendency of an appeal filed by the Commissioner of Income-tax in this Court, the Central Government in exercise of the power conferred by S. 6 of Act 67 of 1949 issued an Order called the "Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, 1962", and added the following Explanation to Cl. 2 of the Removal of Difficulties Order, 1949For the purpose of this paragraph, the expression "all depreciation actually allowed under any laws or rules of a Merged State" means and shall be deemed always to have meant :(a) the aggregate allowance for depreciation taken into account in computing the written down value under any laws or rules in force in a merged State or carried forward under the said laws or rules, and(b) in cases where income had been exempted from tax under any laws or rules in force in a merged State or under any agreement with a Ruler, the depreciation that would have been allowed had the income not been so exempted.This Court held in the appeal filed by the Commissioner of Income-tax that the expression "actually allowed" in the Removal of Difficulties Order, 1949, meant allowance actually given effect to, but by virtue of the Explanation added by the Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, 1962, the correct basis for computing the written down value of the depreciable assets for the relevant period was the one adopted by the Income-tax Officer. Counsel for the assessee challenged the validity of the Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, but the Court declined to consider that plea holding that an authority or court administering the Act cannot permit a challenge to be raised against the vires of the Act: K. S. Venkataraman and Co. (P) Ltd. v. State of Madras, 1966-2 SCR 229 : (AIR 1966 SC 1089 ).11. The assessee then moved in the High Court of Madhya Pradesh a petition under Art. 226 of the Constitution, inter alia, for a writ declaring the 1962 Order ultra vires the Central Government, and for injunction restraining enforcement of the Order. The High Court rejected the petition, and the assessee has appealed to this Court with certificate granted by the High Court.

Court's reasoning:
16. The expression "depreciation actually allowed" therefore connotes under S. 10(2) (vi) of the Income-tax Act, under Cl. (2) of the Removal of Difficulties Order, 1949, and the notification under S. 60-A of the Income-tax Act, depreciation taken into account in assessing the income of an assessee arising from carrying on business, and does not mean depreciation merely allowable or applicable under the taxing provision.17. But the impugned Order seeks to alter the connotation of thatHigh Court of Madhya Pradesh held that the Central Government having issued the 1962 Order, it must be deemed to he held that difficulties had arisen in giving effect to the provisions of Act 67 of 1949 and the opinion of the Central Government in that behalf was conclusive. The Court observedlanguage of the Section clearly shows that it is for the Central Government to decide, as a pure act of administration, whether an obstacle or impediment exists in giving effect to the provisions of the Act, Rule or Order referred to in Section 6 which calls for an order for surmounting the obstacle or removing the impediment. No doubt Section 6 does not expressly say that the Central Government should be satisfied as to the "existence of any difficulty" for the removal of which the making of an Order is necessary. But it is implicit in the language of Section 6 that the Central Government should be satisfied that a difficulty exists in giving effect to the provisions of any Act, Rule or Order extended by Section 3 to the Merged States. If the existence of any "difficulty" depends on the satisfaction, of the Central Government, then it follows that the condition about the existence of any difficulty, for the removal of which the Central Government is empowered to make an Order, is a subjective condition incapable of being determined by any one other than the Central Government which has to take action in theso observing, in our judgment, the High Court plainly erred. Exercise of the power to make provisions or to issue directions as may appear necessary to the Central Government is conditioned by the existence of a difficulty arising in giving effect to the provisions of any Act, rule or order. The Section does not make the arising of the difficulty a matter of subjective satisfaction of the Government: it is a condition precedent to the exercise of power and existence of the condition if challenged must be established as an objective fact.18. The observations made by this Court in Commissioner of Income-tax, Hyderabad v. Dewan Bahadur Ramgopal Mills Ltd., (1961) 2 SCR 318  = (AIR 1961 SC 338 ), on which reliance was placed by the High Court do not support the view that "the arising of a difficulty" is a matter for the subjective satisfaction of the Central Government. In Dewan Bahadur Ramgopal Mills case, (1961) 2 SCR 318  = (AIR 1961 SC 338 ) this Court was called upon to consider the validity of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order,behalf of the assessee it was contended in that case that the notification No. S. R. O. 1139 dated May 8, 1956 issued under Section 12 of the Finance Act of 1950, which was couched in terms substantially the same as Section 6 of Act 67 of 1949, was invalid. This Court rejected the contention observing that in applying the provisions of Clause (b) of sub-section (5) of Section 10 of the Income-tax Act to an assessee in a Part B State there was an initial difficulty, because the laws in force in the Part B States were repealed not by the Indian Income-tax Act, but by the Finance Act, 1950, and to remove that difficulty the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, was passed. That Order was amended by an Explanation issued by the Central Government in exercise of the powers under Section 60A of the Income-tax Act, but the amendment was declared ultra vires by the High Court of Hyderabad, and thereafter another Removal of Difficulties Order was issued in 1956 re-enacting the Explanation. This Court held that by the Removal of Difficulties Order, 1950 an anomalous result followed, and the depreciation allowance allowed to the assessee under the Indian Income-tax Act was more than the depreciation allowance under the Hyderabad Income-tax Act, and it was necessary to issue the Removal of Difficulties Order, 1956. In the view of the Court, in that case the condition precedent to the exercise of the power did exist. After recording that a difficulty requiring removal by an Order under Section 12 of the Finance Act had arisen, the Court proceeded to observe at p. 327the true scope and effect of section 12 seems to be that it is for the Central Government to determine if any difficulty has arisen and then to make such order, or give such direction, as appears to it to be necessary to remove the difficulty. Parliament has left the matter to the executive; but that does not make the notification of 1956High Court of Madhya Pradesh held, relying upon these observations, that the decision of the Central Government that a difficulty had arisen was a matter of subjective satisfaction of the Government and that it was not open to the Courts to investigate that question. We are unable to hold that the observations made by this Court are susceptible of that interpretation. It is clear from the sequence of the observations made by this Court that the Court was satisfied that in fact a difficulty had arisen and that difficulty had to be removed and for removing the difficulty the Order of 1956 wasthat "noting" merely recited that the High Courts in India had not accepted the contention of the Income-tax Department that in cases where the depreciation had to be computed in respect of buildings, machinery, plant and furniture used for the purpose of the business by an assessee who had, under an agreement with the Ruler of an Indian State, been exempted from payment of income-tax, a notional computation of depreciation which would have been allowed, if he had been assessed to pay the tax, should be taken into account for determining the written down value of the assets at the date on which the Income-tax Act was made applicable. Refusal of the Courts to accept a contention raised on behalf of the Revenue arising contrary to the plain words of the statute cannot be regarded as a difficulty arising in giving effect to the provisions of the Act. The difficulty contemplated by the Order is not merely the inability of the Central Government to collect tax which the tax-payer could, in the view of the Government, have been made to pay but which has not been imposed by adequateour judgment, the argument is wholly misconceived. Sub-section (5) of Section 10 is merely a definition clause; it does not deal with the determination of the quantum of depreciation. "Depreciation" in respect of specific assets is allowed under S. 10 (2) (vi) of the Income-tax Act. That clause was applied to the merged States subject to the modification made by the 1949 Order, and the amount actually allowed under the law of the merged State was to be taken into account in determining the written down value, and the depreciation allowance referred to in Clause (c) of the proviso to Cl. (vi) of Section 10 (2). It is impossible, on the words used in S. 10 (5) Cl. (b) read with the 1949 Order, to hold that the written down value of the assets of the assessee in a merged State could not be determined and with a view to remove that difficulty the impugned Order was promulgated. The fact that the assets were acquired by a person at a time when he was not an assessee under the Indian Income-tax Act or under the State Act will not disable him when he is assessed to tax on the profits of the business, from claiming the benefit of the depreciation allowance on those assets if used for the purpose of the business.21. Section 6 of Act 67 of 1949 authorises the Central Government to make provisions or to give directions as may appear to be necessary for removal of difficulties which had arisen in giving effect to the provisions of any Act, rule or order extended by Section 3 to the merged States. By the application of the Indian Income-tax Act to the merged States a difficulty did arise in the matter of determining the depreciation allowance under Section 10 (2) (vi). That difficulty was removed by the enactment of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949. Even by that Order all depreciation actually allowed under any laws or rules of a merged State relating to income-tax was to be taken into account in computing the aggregate depreciation allowance. Thereafter there survived no difficulty in giving effect to the provisions of the Indian Income-tax Act or the rules or orders extended by Section 3 to the merged States.22. To sum up: the power conferred by Section 6 of Act 67 of 1949 is a power to remove a difficulty which arises in the application of the Income-tax Act to the merged States: it can be exercised in the manner consistent with the scheme and essential provisions of the Act and for the purpose for which it is conferred. The impugned Order which seeks, in purported exercise of the power, to remove a difficulty which had not arisen was, therefore, unauthorised.23. We do not in the circumstances think it necessary to determine to what extent, if any, it would be open to the Central Government by an order issued in exercise of the power conferred by Section 6 of Act 67 of 1949 to make a provision which is inconsistent with the provisions of the Indian Income-tax Act. We also need not express any opinion on the other contentions raised by the assessee, i. e., whether the Order, if any, should have been issued under Section 298 of the Indian Income-tax Act, 1961 or whether by reason of the enactment of the impugned order the guarantee of equality before the law was violated.