1965 (12) TMI 30 - SC - Income Tax

Whether the entire depreciation of the assets was taken into consideration in computing the taxable income and, therefore, the entire amount should have been taken into account by the Income-tax Officer in arriving at the written down value of the assets? Held that - 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 rule 33 does not amount to an actual allowance of the entire depreciation in ascertaining the taxable income accrued in India. The Income-tax 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 India. Assessee s contention that under the method adopted in terms of rule 33 of the Income-tax Rules, 1922, no depreciation was allowed at all in ascertaining the taxable income on India, for that was only taken into consideration in arriving at the total world income is not acceptable as we 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 rule 33 of the Rules were adopted, it could be held that no depreciation was actually allowed in making the assessment. Appeal dismissed.

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. Interpretation of "depreciation actually allowed" in the context of the Indian Income-tax Act, 1922, and the Indore Industrial Tax Rules, 1927.

Detailed Analysis:

Issue 1: Legality and Validity of the Computation of Written Down Value
The primary issue revolves around the interpretation of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, specifically regarding the computation of aggregate depreciation allowances for tax assessment purposes. The respondent company, which was assessed under both the Indian Income-tax Act, 1922, and the Indore Industrial Tax Rules, 1927, faced difficulties due to differing depreciation rates under these laws. The Order stipulated that in cases of disparity, the greater of the two depreciation sums should be adopted. The Income-tax Officer computed the written down value by considering depreciation allowances up to 1944 under the Indian Income-tax Act and from 1945 to 1948 under the Indore Industrial Tax Rules. This computation was upheld by the Appellate Assistant Commissioner and the Appellate Tribunal.

The High Court of Madhya Pradesh, however, held that the depreciation allowed up to 1944 should be the one actually allowed against the taxable income, not the world income. The Supreme Court agreed with this interpretation, stating that the key term "allowed" in the Order means the depreciation actually allowed under the relevant laws. Therefore, the High Court's interpretation that only the depreciation actually allowed in arriving at the taxable income should be considered was upheld.

Issue 2: Interpretation of "Depreciation Actually Allowed"
The second issue concerns the interpretation of "depreciation actually allowed" under the Indian Income-tax Act, 1922, and the Indore Industrial Tax Rules, 1927. The High Court's interpretation, which the Supreme Court upheld, was that the term "depreciation actually allowed" refers to the depreciation deducted in arriving at the taxable income. The Supreme Court emphasized that the expression "allowed" in the Order, the proviso, and the Explanation all mean the same thing: the depreciation actually allowed under the relevant laws.

The Court clarified that during the years when the assessee was taxed as a non-resident, only a fraction of the total depreciation was actually allowed in ascertaining the taxable income in India. The Income-tax Officer's method of first calculating the total world income and then applying Rule 33 to determine the taxable income in India did not mean that the entire depreciation was allowed. Only the proportionate amount of depreciation relevant to the income taxable in India was actually allowed.

Separate Judgment by Shah J.
Shah J. delivered a separate judgment, concurring with the majority but providing additional reasoning. He emphasized that the entire depreciation considered in determining the total world income should be taken into account for the written down value. He disagreed with the High Court's view that only a fraction of the total depreciation should be considered. Shah J. argued that depreciation is deducted once and for all in determining the total profits of the business, and there is no basis for assuming that only a fraction of the depreciation is allowed.

Conclusion
The Supreme Court dismissed the appeals, upholding the High Court's interpretation that the depreciation actually allowed means the depreciation deducted in arriving at the taxable income. The Court clarified that only the proportionate amount of depreciation relevant to the income taxable in India should be considered in computing the written down value of assets. Shah J.'s separate judgment, while concurring with the majority, provided a different perspective on the interpretation of depreciation allowances.

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