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TMI Blog1974 (11) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ulation, which is relevant for our purposes, reads as follows: "7. If any difficulty arises in giving effect in any Union Territory to the provisions 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 allowance in the nature of depreciation was permitted in computing the gross income. Under clause (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 be prescribed. Written down value is defined in section 43(6) as follows: "(6) 'Written down value' means-- (a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds: "The basic and normal scheme of depreciation under the Indian Income-tax Act is that it decreases every year, being a percentage of the written down value which in the first year is the actual cost and in succeeding years actual cost less all depreciation actually allowed under the Income-tax Act, or any Act repealed thereby, etc." If, therefore, because there was no provision under the income-tax law applying to the former Portuguese territories providing for depreciation the written down value of an asset is taken as the actual cost even after many years of its acquisition it would mean putting the assessee in those territories at an advantage compared to the assessees in the rest of India. More important, it would not accord with realities and would not be in accordance with the scheme of depreciation under the Indian Income-tax Act. It is, therefore, necessary to devise some method by which both can be put on the same footing and the normal scheme of depreciation under the Indian Income-tax Act made applicable to them. It cannot be argued that a certain plant and machinery purchased 10 years earlier and now worth half its original value should still be taken to be worth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egate depreciation allowance and the written down value.--In making any assessment under the Indian Income-tax Act, 1922, all depreciation actually allowed under any laws or rules of a Part B State relating to income-tax....on profits of business, shall be taken into account in computing the aggregate depreciation allowance referred to in sub clause (c) of the proviso to clause (vi) of sub-section (2) and the written down value under clause (b) of sub-section (5) of section 10 of the said Act." Taking advantage of the presence of the words "all depreciation actually allowed" in this Order the assessee argued that only the depreciation allowed after the Hyderabad Income-tax Act came into force should be taken into account for the purpose of arriving at the written down value for the purposes of the Indian Income-tax Act. That was on the basis that the depreciation allowance calculated for the three years before the Hyderabad Income-tax Act came into force was not "depreciation actually allowed" because in those years there was no income-tax assessment and there was no question of any depreciation being allowed. In other words, what the assessee said was that taking the original co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Act. It was, therefore, necessary to explain paragraph 2 of the Removal of Difficulties Order, 1950, to assimilate or harmonise the position regarding depreciation allowance, and the Explanation added in 1953 or 1956 was obviously intended to remove the difficulty arising out of that disparity or disharmony." In effect, it means in terms of the example which we have given earlier that instead of the written down value being taken to be Rs. 53.10 when the Indian Income-tax Act was extended to Hyderabad the assessee wanted Rs. 80.20 to be taken as the written down value and that was why this court pointed out that the depreciation allowed to the assessee in the accounting year under the Indian Income-tax Act would be more than what was allowed under the Hyderabad Income-tax Act and that this would create a disparity and be against the scheme of the Indian Income-tax Act. This decision is exactly to the point. The effect of the argument on behalf of the petitioners would be, taking it that in Goa also the asset had been acquired for Rs. 100 six years before the Indian Income-tax Act, 1961, was extended to that area and the rate of depreciation was also ten per cent. that instea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enactment of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949. Even by that Order all depreciation actually allowed under any laws or rules of a merged State relating to income-tax was to be taken into account in computing the aggregate depreciation allowance. Thereafter, there survived no difficulty in giving effect to the provisions of the Indian Income-tax Act or the rules or orders extended by section 3 to the merged States. To sum up: the power conferred by section 6 of Act 67 of 1949 is a power to remove a difficulty which arises in the application of the Income-tax Act to the merged States it can be exercised in the manner consistent with the scheme and essential provisions of the Act and for the purpose for which it is conferred. The impugned Order which seeks, in purported exercise of the power, to remove a difficulty which had not arisen was, therefore, unauthorised." That was the ratio of that decision. This court specifically did not think it necessary to determine to what extent, if any, it would be open to the Central Government by an order issued in exercise of the power conferred by section 6 of Act 67 of 1949 to make provision which is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation and arrive at the written down value as on the date when the Indian Income-tax Act was extended to the former Portuguese territories. To accede to the claim of the assessees that the original value of the assets should be taken down to be the written down value, however long they might have been used, means that they get an advantage not merely in the first year in which the Indian Income-tax Act was applied to those territories. It is a continued advantage which will last as long as these assets last. In terms of the example we have given earlier in the first year instead of the 10 per cent. out of the written down value of Rs. 53.10, that is, Rs. 5.30, being allowed as the depreciation, it will be Rs. 10. In the second year it will be Rs. 9 instead of Rs. 4.77. In the third year it will be Rs. 8.10 as against Rs. 4.30 and so on. I can see no justification either on principle or on the wording of the statute to allow the assessees any such concession. Whatever I have stated earlier would be sufficient to show that the impugned order is not in excess of the delegated powers but merely carries out the purpose of the delegation. It only remains to deal with the further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anting 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. Clause 7 provides: "If any difficulty arises in giving effect in any Union Territory to the Provisions 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." 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 runs thus: "Whereas certain difficulties have arisen in giving effect to the provisions of the Income-tax Act, 1961......... in the Union Territories of Goa, Daman, Diu.........Now therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 clause (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. In the light of the second 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 where 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. In the case of petitioners in Writ Petitions Nos. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is known as the "written-down value" method. Both these methods seek to ensure that the aggregate of the depreciation allowances granted, year after year, does not exceed hundred per cent, of the original cost of the asset. In the straight-line method, however, the entire depreciation is written off sooner than in the "written-down value" method, if the figures of actual cost of the asset and the prescribed percentage are the same in either case. Sub-section (2) of section 32 allows the carry forward of unabsorbed depreciation allowance to any subsequent year, without any time-limit, where such non-absorption is "owing to there being no profits or gains chargeable for the previous year or owing to the profits or gains being loss than the allowance". Depreciation loss under section 32(2) thus, to a large extent, stands on the same footing as other business losses. An assessee claiming depreciation of assets has to show that such assets are owned by him and were used by him in the account year for the purpose of his business, the profits of which are being charged [section 32(1)(i)]. Further, the total of all deductions in respect of depreciation under section 32(1)(i) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orward, for no fault of the assessee, the "written-down value" may, under clause (b) of section 43(6), also, be the actual cost of the assets to the assessee. Relying on the ratio of this court's decision in Straw Products Ltd. v. Income-tax Officer, Bhopal, learned counsel for the petitioners have pressed these points into argument: (1) The "arising of a difficulty" in giving effect to the Indian Income-tax Act or Rules, etc., made thereunder is a condition precedent to the invocation of the power under clause (7) of the Regulation, and since the existence of that condition had not been established as an objective fact, the Central Government had no power to promulgate the impugned proviso. It is stressed that the Act has been applied all these years since its extension in April, 1963, to these territories without any difficulty. (2) The power under clause (7) of the Regulation can be exercised only in a manner consistent with the scheme and essential provisions of the Act. The impugned proviso seeks to amend and change the scheme and basic provisions of the Act inasmuch as it provides, inconsistently with sections 43(6) and 32 of the Act, for determining the written-down va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged States "a difficulty did arise in the matter of determining the depreciation allowance under section 10(2)(vi)" which corresponds to section 32(1)(ii) of the 1961 Act, and that this "difficulty" was removed by the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949. It is further contended that once it was found that such a difficulty had arisen, the Central Government could, in the legitimate exercise of its powers under clause (7) of the Regulation, remove the same by providing that allowances, where they were not actually allowed, should be deemed to have been allowed for the purpose of depreciation in prior years. On this point reliance has been placed on Commissioner of Income-tax v. Straw Products and Commissioner of Income-tax v. Dewan Bahadur Ram Gopal Mills Ltd. Since both sides rely more or less on the decision of this court in Straw Products Ltd. v. Income-tax Officer, Bhopal, and the other two authorities cited have also been noticed therein, it will be appropriate to examine the same in detail. The assessee therein was a company formed in 1937 in Bhopal State and was exempted by the Ruler of that State from payment of all taxes for a period of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 and recomputed its taxable income on the footing that since the commencement of the business the assessee must be deemed notionally to have been allowed depreciation under the Bhopal Income-tax Act. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal disagreed with the Income-tax Officer and restored the original assessment. On a reference made by the Appellate Tribunal, the High Court held in favour of the assessee. The Income-tax Commissioner appealed to this court. During the pendency of that appeal, the Central Government in exercise of its power under section 6 of the Act, 67 of 1949, issued an Order called the Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, 1962, adding this Explanation to the order of 1949: "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) the aggregate allowance for depreciation taken into account in computing the written down value under any laws or rules in force in a merged State or carried forward under the said laws or rules, and (b) in cases where incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Government is conditioned by the existence of a difficulty arising in giving effect to the provisions of any Act, rule or order. The section does not make the arising of the difficulty a matter of subjective satisfaction of the Government; it is a condition precedent to the exercise of power and existence of the condition, if challenged, must be established as an objective fact." The court held that after the promulgation of the 1949 Order no difficulty survived or arose in giving effect to the provisions of section 10 of the 1922 Act. In that connection, it was observed: "It is impossible, on the words used in section 10(5), clause (b), read with the 1949 Order, to hold that the written down value of the assets of the assessee in a merged State could not be determined and with a view to remove that difficulty the impugned Order was promulgated. The fact that the assets were acquired by a person at a time when he was not an assessee under the Indian Income-tax Act or under the State Act will not disable him, when he is assessed to tax on the profits of the business, from claiming the benefit of the depreciation allowance on those assets if used for the purpose of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned Order of 1962. This allegation was denied by the respondents, and it was contended on their behalf that the "arising of a difficulty" in the enforcement of the Income-tax Act was a matter for subjective satisfaction of the Government. Precisely similar pleas have been taken in the affidavits of the parties in the present case (vide W. Ps. Nos. 112, 391-394 of 1971). The position here is very much the same as was in Straw Products' case. Here also, the respondents' plea, in substance, is that there is a deficiency or omission in the provisions of sections 32 and 43(6) of the 1961 Act and unless the deficiency or omission was supplied, it would be difficult for the Central Government to collect tax and allow depreciation to assessees like the petitioners to the same extent or at the same rate at which it has been collected from or allowed to assessees who have throughout been assessed under the Indian Income-tax Act. This raises two questions: (1) Is this a "difficulty" within the contemplation of clause (7) of the Regulation ? (2) Is the Central Government in the exercise of its power under that clause competent to supply a deficiency or casus missus of this nature ? F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the clause must be a difficulty arising in giving effect to the provisions of the Act and not a difficulty arising aliunde or an extraneous difficulty. Further, the Central Government can exercise the power under the clause only to the extent it is necessary for applying or giving effect to the Act, etc., and no further. It may slightly tinker with the Act to round off angularities, and smoothen the joints or remove minor obscurities to make it workable, but it cannot change, disfigure or do violence to the basic structure and primary features of the Act. In no case, can it, under the guise of removing a difficulty, change the scheme and essential provisions of the Act. The above principles, particularly the distinction between a "difficulty" which falls within the purview of the removal of difficulty clause and one which falls outside it, finds ample illustration in the 1949 Order and the impugned provision of the 1962 Order which came up for consideration in Straw Products' case. Excepting the reference to the corresponding provision of the 1922 Act, the language of the 1949 Order was the same as that of the unimpugned part of clause (3) of Order 2 of 1970 in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d contemplated by that clause, because it did not, in fact, arise in the application or enforcement of the Income-tax Act, but de hors it. No difficulty in implementing the scheme of the 1922 Act read with the 1949 Order existed as an objective fact. The 1962 Order, Explanation (b), purported to substitute in section 10(5)(b) of the 1922 Act (as adopted by the 1949 Order) "depreciation notionally allowed" for "depreciation actually allowed". This the Central Government was not competent to do under that clause because "depreciation actually allowed" was the linchpin of the statutory definition of "written-down value." Indeed, the 1962 Order sought to amend the essential provisions of the Income-tax Act in an attempt to collect tax which, in the opinion of the Central Government, the taxpayer could and should pay but--to recall the words of this court "which has not been imposed by adequate legislation". In the present cases also, the impugned proviso of the 1970 Order seeks to do the same thing by raising the taxable income of the assessee, inconsistently with the scheme of the 1961 Act. Although the language of the impugned proviso, in the present case, is not identical with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s itself demonstrates that there was no difficulty in applying the aforesaid provisions to the cases of these assessees. 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, about seven years back. If that decision did not correctly interpret the intendment of the legislature, 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. We may now notice this court's decision in Commissioner of Income-tax v. Dewan Bahadur Ramgo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld the validity of the impugned provision. Therein, it was manifest that in applying the provisions of section 10(5)(b) of the 1922 Act to the assessees from Hyderabad (a Part B State), there was an initial difficulty because the Hyderabad Income-tax Act had been repealed not by the 1922 Act but the Finance Act, 1950. This difficulty could be validly removed by making an Order under section 12 of the Finance Act, 1950. Attempt to remove it by issuing the 1950 Order did not completely achieve its object. In its application that Order led to an anomalous namely, the written down value of the assets and the allowance to be allowed on its basis to the assesse in the accounting year on first assessment under the Indian Income-tax Act would be more than what it was allowed in previous under the Hyderabad Income-tax Act. It was to remove this and to hamonise the position as to depreciation with the scheme of the Income-tax Act, that the impugned Explanation was added by the 1956 Order. It will be seen that under the Hyderabad Income-tax Act, depreciation had actually been allowed to the assessees on the basis of written down value calculated according to the mechanism provided in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that the former did not support the view that "the arising of a difficulty is a matter for the subjective satisfaction of the Central Government". The present case is not in pari materia with D. B. Ramgopal Mills case. It is in line with Straw Products Ltd. v. Income-tax Officer and the ratio of the latter decision and the observations made therein with regard to the then impugned Order of 1962 apply with full force to the impugned proviso in the instant cash. In the light of what has been said above, we accept the contentions (1) contentious (1) and (2) advanced on behalf of the petitioners. Be that as it may, the last contention canvassed by Mr. Palkhivala is a clincher. The argument is that the impugned proviso is not workable, because under the Portuguese law there was no tax on income at all. These territories were merged with India on December 19, 1961, and the Indian Income-tax Act was extended to these territories from April 1, 1963. During this interregnum, it is contended, there was no law, either Portuguese or Indian, under which the income of those prior years could be computed. If there is a loss, or profit is inadequate to absorb the depreciation, the latter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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