1961 (9) TMI 96 - HC - Income Tax

Summary

Issues Involved:

1. Legality and validity of the computation of the written down value of assets under the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950.
2. Validity of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, and its modifications in light of the Indian Income-tax Act, 1922, the Finance Act, 1950, and the Constitution of India.
3. Interpretation of "depreciation actually allowed" in the context of taxable income versus world income.

Detailed Analysis:

1. Legality and Validity of the Computation of Written Down Value:

The assessee, a public limited company running a textile mill and ginning factories, was assessed under the Indian Income-tax Act, 1922, after its extension to Part B States. For the assessment years 1950-51 to 1953-54, the computation of the written down value of the company's assets as of 1st January 1949 was in question. The Income-tax Officer applied the proviso to the second paragraph of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, which required taking into account the greater of the depreciation allowances allowed under the Indian Income-tax Act and the Indore Industrial Tax Rules, 1927. This resulted in a written down value of nil for the textile machinery as of 1st January 1949. The assessee contended that the written down value should be determined solely based on the depreciation allowed under the Indian Income-tax Act, arguing that the Removal of Difficulties Order, 1950, was ultra vires. This contention was rejected by the Income-tax Officer, the Appellate Assistant Commissioner, and the Appellate Tribunal.

2. Validity of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950:

The Supreme Court in Commissioner of Income-tax v. Dewan Bahadur Ramgopal Mills Ltd. upheld the validity of paragraph 2 of the Removal of Difficulties Order, 1950. The Court noted that there was a difficulty in applying section 10(5)(b) of the Income-tax Act to an assessee in a Part B State because no depreciation could have been allowed under the Income-tax Act before its extension to these states. The Central Government issued the Removal of Difficulties Order to address this issue. The Supreme Court held that it was within the Central Government's purview to determine if any difficulty existed and to issue necessary orders under section 12 of the Finance Act, 1950. Consequently, the various grounds challenging the validity of the Order of 1950 did not survive, and the Order was deemed valid.

3. Interpretation of "Depreciation Actually Allowed":

The main controversy centered on whether the depreciation actually allowed under the Income-tax Act against the total income should be taken into account or whether the depreciation allowance deducted in working out the total world income should be considered. The assessee argued that the depreciation allowed for the years up to and inclusive of 1944 should be the depreciation actually allowed against the total income, not the total world income. The court agreed with the assessee, stating that under section 10(5)(b) of the Act, "written down value" means the actual cost to the assessee less all depreciation actually allowed to him under the Act. The court concluded that it is the greater of the two depreciation allowances actually allowed that has to be taken into account, not the depreciation computed against the total world income. The explanation added to paragraph 2 of the Order in 1956 did not alter this interpretation.

Conclusion:

The court answered the first question by stating that the depreciation allowed for the years up to and inclusive of 1944 in the assessment made in the taxable territories would be the depreciation actually allowed against the total income, not the total world income. The second question was answered in the affirmative, confirming the validity of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, as upheld by the Supreme Court. The third question was not pressed, and therefore, no answer was provided. The fourth question was answered by stating that "depreciation actually allowed" means the depreciation deducted in arriving at the taxable income. The assessee was awarded the costs of the reference.