Case: Commissioner Of Income-Tax, Madhya Pradesh Etc Vs. M/S. Straw Products Ltd., Bhopal

2. The relevant facts are these. The respondent. M/s. Straw Products Ltd., Bhopal, hereinafter called the assessee, is a public limited company. It was incorporated in the erstwhile State of Bhopal in 1939 and was given the certificate of commencement of business on May 30, 1939. On September 20, 1938, the assessee entered into an agreement with the Government of Bhopal. Under the agreement the assessee obtained certain concessions and facilities The assessee not only got exclusive licence to manufacture card-board articles of all kinds but also got land on lease on favourable terms. It was also exempted from payment of customs and other duties payable to the municipality. Clause 8 of the agreement is relevant for the purpose of these appeals and is in the followingSubject to and so far as the State shall not become or become obliged by any Instrument of Accession or Supplementary Instrument under the Government of India Act, 1935, in respect of any Federal Taxation, it is hereby agreed as follows:(a) During the period of 10 years from the date on which the said Company takes over the land for its business purposes the said Company shall not be liable to pay any sum by way of taxation to the State.It is common ground that this Agreement was acted upon and for a period of 10 years the assessee was not called upon to submit any returns of income and no assessment was made on the assessee under the Bhopal Income-tax Act. This period of ten years expired on October 31, 1948. On August 1, 1949, Bhopal merged in India and was formed into a Chief Commissioners Province.4. For the assessment year 1949-50, the assessee was assessed under the Indian Income-tax Act, 1922, on the total income of the period November 1, 1948, to December 12, 1948, as the assessee made up its accounts on the 31st December each year. For the assessment years 1952-53 and 1953-54, the assessment years which are the subject-matter of this reference (previous years Calendar years 1951 and 1952, respectively), the Income-tax Officer, by orders dated November 27, 1952 and September 30, 1953, allowed depreciation on the machinery, buildings and others assets owned by the assessee on the basis of the original cost, i.e. the cost paid in 1939. Subsequently noticing a report in the Times of India, dated March 15, 1957, giving the view taken by the Bombay High Court in the case of Dhrangadhara Chemical Works Limited, In re, I. - T. Ref. No. 60 of 1956 dated 14-2-1957 (Bom), the Income-tax Officer initiated action under S. 34(1) of the Act in respect of these two assessment years. In the Dhrangadhara Chemical Works case, I. - T. Ref. No. 60 of 1956 dated 14-2-1957 (Bom) the Bombay High Court had held that the written down value on the opening day of the account period for which assessment is to be made under the Indian Income-tax Act should be taken at the actual cost less the depreciation which could have been claimed under the Indian Income-tax Act, 1922. After hearing the assessees objections, the Income-tax Officer by his order dated March 4, 1958, held that "the written down value of the assets of the company will have to be redetermined as on 1st January, 1951. This would be done by first determining the written down value of assets as on 1st November, 1948 under the Bhopal Income-tax Act. From the written down values so ascertained, all depreciation actually allowed till 31st December 1950 would be deducted. The net figures thus arrived at would show the written down value of the assets in the beginning of the assessment year 1952-53. Consequently, the depreciation of Rs. 2,71,961 allowed in the original assessment for 1952-53 was reduced to Rs. 1,29,883 and for the assessment year 1953-54 the original depreciation allowance of Rs. 2,87,285 was reduced to Rs. 1,72,673.5. The Appellate Assistant Commissioner, disagreeing with the Income-tax Officer, held on appeal that the assessee had not been allowed excess depreciation allowance as per the original assessment and there was no basis for initiating proceedings under S. 34. He was of the view that the expression "actually allowed could not imply depreciation allowed by a mental phenomenon. The Appellate Tribunal upheld the order of the Appellate Assistant Commissioner and directed the computation of the allowance on that basis. On a reference the High Court by its judgment dated August 22, 1961, answered the question asthe circumstances of this case the correct basis for computing written down value of depreciable assets of the company is the one adopted by the Appellate Assistant Commissioner.On August 20, 1962, in exercise of the powers conferred by S. 6 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949 (LXVII of 1949) the Central Government made the following order to amend the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949. The order was called the Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962. (hereinafter referred to as the 1962 Order). The relevant part of para 2 is the following terms.In the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, after the proviso to paragraph 2, the following Explanation shall be inserted,Explanation.- For 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)(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. 2 of the Taxation Laws (Merged States) (Removal of Difficulties) Order 1949 reads asComputation of aggregate depreciation allowance and the written-down valueIn making 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 Cl. (vi) of sub-section (2) and the written-down value under Cl (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 merged State and in British India, the greater of the two sums allowed shall only be taken into account.This order was made in exercise of the powers conferred by S. 8 of Taxation Laws (Extension of Merged States). Ordinance, 1949 (XXI of 1949). The Ordinance, which applies to Bhopal, by S. 3(1) extended inter alia the Indian Income Tax Act, 1922, and all rules and orders made there-under to all the merged States, and by S. 3(2) the Indian Income-tax Act 1922 and the rules and orders made thereunder were extended and brought in force in all the merged States on April 1, 1949. Section 8 of the Ordinance provided asany difficulty arises in giving effect to the provisions of this Ordinance, the Central Government may by order make such provisions, or give such directions, as appear to it to be necessary for removal of theTaxation Laws Amendment (Second) Ordinance, 1949 (No. XXXIII of 1949) inter alia made various amendments in the Indian Income-tax Act, 1922.8. These Ordinances were replaced by the Taxation Laws (Extension of Merged States and Amendment) Act, 1949 (LXVII of 1949). Section 3 of this Act is similar to S. 3 of the First Ordinance. Section 6, which took the place of S. 8 of the First Ordinance, reads asany difficulty arises in giving effect to the provisions of any Act, rule or order extended by S 3 to the merged States, the Central Government may, by order, make such provision or give such directions as appear to it to be necessary for removal of the34 repealed Ordinance XXI of 1949 and Ordinance XXXIII of 1949, but by subsection (2) inter alia provides asdone or any action taken in the exercise of any power conferred by any of the Ordinances referred to in this section shall for all purposes be deemed to have been done or taken in the exercise of the powers conferred by this Act as if this Act were in force on the day on which such thing was done or action was taken

Court's reasoning:
, Mr. Desai contends that the question referred to the High Court in this case is not couched in terms of sufficient amplitude to cover the points he has tried to make, namely, whether the order dated August 22, 1962 is retrospective and whether the assessee is covered by the terms of Cl. (b) of the Explanation.Looking at the question it seems to us that the substance of the question which was referred was whether the view held by the Income-tax Officer or the Appellate Assistant Commissioner was right, and the words "having regard to occurring in the question did not have the effect of restricting the laws that could be considered for answering the question. It may also be said that when paragraph 2 of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, is referred to, it would include paragraph 2 as amended retrospectively. We must, therefore, overrule Mr. Desais objection and hold that the question framed by the Appellate Tribunal is wide enough to include a discussion of the amendments made retrospectively in the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949.17. In conclusion, applying the 1962 order to the facts of this case it is clear that the answer to the question referred must be that the correct basis for computing the written down value of the depreciable assets as on November 1, 1948. is the one which was adopted by the Income-tax Officer.We are unable to give such an artificial meaning to the expression "all depreciation actually allowed under any laws or rules, and we agree with the High Court that the expression "actually allowed is unambiguous and connotes the idea that the allowance was actually given effect to.If it was intended to include any allowances which are not actually allowed then the Central Government would have added a deeming provision as the legislature did in the Explanation to S. 10(5) of thefollowing this judgment, we must hold that Mr. Sastri is entitled to rely on the 1962 order and it is our duty to answer the reference in accordance with the amendment made by the order, unless the question referred is not couched in terms of sufficient amplitude to cover an enquiry into the question in the light of the amended law.