1974 (11) TMI 7 - SC - Income Tax

Constitutional validity of the Taxation Laws by which the Indian Income-tax Act was extended - held that the second proviso to clause 2 of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order 2 of 1970, is ultra vires the Central Government when exercising the powers under clause (7) of Regulation III of 1963, and the revenue authorities are not entitled to levy tax on the basis of the depreciation allowance computed in accordance with the said proviso in the Order

Issues Involved:
1. Constitutional validity of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order 2 of 1970.
2. Interpretation and application of depreciation provisions under the Indian Income-tax Act, 1961, to Union Territories of Goa, Daman, and Diu.
3. The legality of retrospective application of the 1970 Order.
4. The practical implications and workability of the 1970 Order.

Issue-Wise Detailed Analysis:

1. Constitutional Validity of the 1970 Order:
The primary issue was the constitutional validity of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order 2 of 1970, promulgated under clause 7 of the Taxation Laws (Extension to Union Territories) Regulation, 1963. This Order extended the Indian Income-tax Act, 1961, with certain amendments, to the Union Territories of Goa, Daman, and Diu. The petitioners challenged the second proviso to clause 2 of the 1970 Order, arguing that it was beyond the powers conferred by clause 7 of the Regulation. The Court held that the impugned proviso was ultra vires the Central Government's powers under clause 7, as it sought to amend the essential provisions of the Indian Income-tax Act by introducing a concept of "depreciation fictionally allowed" instead of "depreciation actually allowed."

2. Interpretation and Application of Depreciation Provisions:
The Court examined the provisions of sections 32, 34, and 43(6) of the Indian Income-tax Act, 1961, which deal with depreciation. It was noted that the scheme of the Act allows depreciation year after year on the actual cost of the assets as reduced by the depreciation actually allowed in earlier years. The key term "actually allowed" means depreciation that has been taken into account and given effect to by the income-tax authorities. The Court found that the impugned proviso, which sought to deem depreciation as allowed even when it was not actually allowed under the Portuguese law, was inconsistent with the scheme of the Indian Income-tax Act.

3. Legality of Retrospective Application:
The Court addressed the contention that the 1970 Order was given retrospective effect, which was argued to be invalid. The Court referred to its earlier decision in Ramgopal Mills Ltd.'s case, stating that the power to remove difficulties must necessarily include the power to remove the difficulty from the very beginning. Therefore, the retrospective application of the 1970 Order was not inherently invalid, but the specific provisions of the Order were found to be beyond the scope of the delegated powers.

4. Practical Implications and Workability:
The Court also considered the practical implications of the 1970 Order. It was argued that the Order would create difficulties rather than removing them, as it would be impossible for assessees to produce all the accounts of earlier years to show the losses incurred and depreciation entitled. The Court found merit in this argument, noting that the Portuguese law did not provide for depreciation and that there was no machinery to determine losses or insufficient profits for the period before 1963. This made the impugned proviso unworkable and created additional difficulties for the assessees.

Conclusion:
The Court allowed the writ petitions, declaring that the second proviso to clause 2 of the 1970 Order was ultra vires the Central Government's powers under clause 7 of Regulation III of 1963. The revenue authorities were not entitled to levy tax based on the depreciation allowance computed in accordance with the impugned proviso. The respondents were ordered to pay the costs of the petitioners.

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