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

1. These matters have been argued twice, once by Mr. K. Sen on behalf of the petitioners in W. P. Nos. 112, 391-394 of 1971 and again by Mr. N. A. Palkhiwala on behalf of the petitioners in W. P. Nos. 330-331 and 382-387 of 1974. The question that arises in all these petitions is the constitutional validity of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order 2 of 1970 issued under clause 7 of the Taxation Laws (Extension to Union Territories) Regular 1963 by which the Indian Income-tax Act war extended, with certain amendments, to the Union Territories of Goa, Deman and Diu with effect from April 1, 1963. Clause 7 of that Regulation, which is relevant for our purposes, reads asIf any difficulty arises in giving effect in any Union Territory to the visions of any Act, or of any rule, notification or order made or issued thereunder, the Central Government may, by general or special order published in the Official Gazette, make such provisions or give such directions as appear to it to be expedient or necessary for the removal of the difficulty.Under the law in force in the former portuguese territories of Goa, Daman and Diu income-tax was levied at a certain percentage of the gross receipts of an assessee. No allow in the nature of depreciation was permitted m computing the gross income. Under CL (ii) of Section 32 (1) of the Indian Income-tax Act, 1961 depreciation is allowed in the case of buildings, machinery, plant or furniture at such percentage on the written down value thereof as may beThe petitioners are carrying on business in the Union Territories of Goa, Daman and Diu. Respondents 1 and 2 are the Union of India and the Income-tax Officer, respectively.10. Goa, Daman and Diu are erstwhile Portuguese territories which became a part of the Union of India on and from December 19,1961. Thereupon, the President of India in exercise of powers under Article 240 of the Constitution promulgated the Taxation Laws (Extension to Union Territories) Regulation III of 1963 (for short, the Regulation). By clause (3) of this Regulation, amongst other laws, the Indian Income-tax Act, 1961 (for short, the Act) was extended to the Union Territory of Goa, Daman and Diu with effect from April 1, 1963 subject to certain modifications, one of which was the insertion of Section 294-A in the Act. Section 294-A gave power to the Central Government to make exemption, reduction or modification in respect of income-tax to avoid hardship or anomaly or to remove difficulty in the application of the Act to any assessee in the Union Territories of Dadra Nagar Haveli, Goa, Daman and Diu etc. The power granting the exemption etc. was exercisable before March 31,1967.we are not concerned with the section because the impugned order was not made under it.By clause (4) of the Regulation, the laws in force in the Union Territory corresponding to the Acts specified in the Schedule, stand repealed from April 1, 1963.12. Clause (7)any difficulty arises in giving effect in any Union Territory to the provisions or any Act, or of any rule, notification or order made or issued thereunder, the Central Government may, by general or special order published in the Official Gazette, make such provisions or give such directions as appear to it to be expedient or necessary for the removal of the difficulty.On November 8,1970 the Central Government in purported exercise of its powers under clause (7) of the Regulation promulgated the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order No. 2 of 1970 (hereinafter called the 1970 Order), the material part of which runscertain difficulties have arisen in giving effect to the provisions of the income-tax Act, 1961...... in the Union Territories of Goa, Daman, Diu therefore the Central Government hereby makes the following order...............(2) It shall be deemed to have come into force on the 1st day of April 1963.(3) Computation of aggregate depreciation allowable and written down value-In making any assessment under the Income-tax Act, 1961 (43 of 1961) all depreciation actually allowed under the local laws shall be taken into account in computing the aggregate of all deductions in respect of depreciation referred to in clause (1) of sub-section (2) of S. 34, and the written down value under sub-clause (2) of Cl. (6) of S. 43 of the said Act:Provided that where in respect of any asset, depreciation has been allowed for any year both in the assessment made under the local law and in the assessment made under the Income-tax Act, 1886, the greater of the two sums allowed shall only be taken into account,Provided further that where in respect of any period no depreciation was actually allowed under the local law or the depreciation actually allowed cannot be ascertained, depreciation in respect of that period shall be calculated at the rate for the time being in force under the Income-tax Act, 1961 or under the Indian Income-tax Act, 1922, or any Act repealed by that Act or under any executive orders, issued when the Indian Income-tax Act, 1886 was in force, as the case may be, and the depreciation so calculated shall be deemed to be the depreciation actually allowed under the local law.As clarified by the Explanation, "local law" in relation to the Union Territory of Goa, Daman and Diu means the Portuguese law relating to tax on income as in force immediately before April 1, 1963. In these territories, there was in force a Portuguese law relating to levy of tax, the scheme of which was entirely different from that of the Indian Income-tax Act. Under that law there- was no provision for granting depreciation allowance; the net profits and gains of the business were not calculated and the tax was levied at a certain percentage on the gross income or turnover of the business, irrespective of whether the assessee had made profits or suffered losses.15. After the extension of the Act to Goa, Daman and Diu. the petitioners were assessed under the Act for several assessment years from 1964-65 onwards. In each of the completed assessments, the assessee was allowed depreciation of the assets used by him for his business, on the basis of written down value under Cl. (b) of Section 43 (6) read with Section 32. For the assessment year 1964-65 the written down value was taken as the actual cost of the assets to the assessee since no depreciation was actually allowed to him earlier. In each of the succeeding annual assessments the written down value was progressively reduced by deducting the depreciation actually allowed in the preceding year from the actual cost of the assets.16. In the light of the 2nd Proviso to clause (3) of the 1970 Order, the past completed assessments in the case of these petitioners are being revised. In consequence, the written down value of the assets for calculating the depreciation allowance - even for the first time when the petitioners were assessed under the Act, would not be the actual cost of the assets to the assessee, but a far lower sum with proportionate increase in the petitioners liability to tax since the assessment year 1964-65.17. In the case of petitioners in Writ Petitions 330-331 of 1971, the Respondent (Income-tax Officer) has already "revised" the assessment for the year 1965-66. and reduced the depreciation allowed in view of the 1970 Order and in the result raised a higher demand. He has, however, kept that demand in abeyance till the decision of these petitions, wherein the validity of the 2nd Proviso (hereinafter called the impugned Proviso) to clause (3) of the 1970 Order is in question.

Court's reasoning:
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.