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TMI Blog1965 (12) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... e building, machinery, plant, etc. of the respondent-company as on January 1, 1949. On April 1, 1950, the Indian Income-tax Act, 1922, was extended to Part B States, including Madhya Bharat of which Indore became a part. Till the said date, the assessee was for many years assessed in the Companies Circle, Bombay, as a non-resident and for some years as a resident under the Indian Income-tax Act, 1922. It was also assessed to industrial tax under the Indore Industrial Tax Rules, 1927. For those years in which it was assessed as a non-resident under the Indian Income-tax Act, 1922, only that part of its profits which could be said to be attributable to the sale proceeds of goods received in British India or in regard to which contracts were accepted in British India was brought to tax. After the Indian Income-tax Act was extended to Indore, difficulties arose in the matter of fixing depreciation allowances, for the rates obtaining under the Indian Income-tax Act and those obtaining under the Indore Industrial Tax Rules, 1927, were not the same. After the merger of the State in the Indian Union, in order to rationalize the tax structure, the Central Government in exercise of the power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding 1944 in the assessments made in the taxable territories would be the depreciation which was actually allowed against the taxable income and not the depreciation computed against the total world income. On the 4th question, it answered that the depreciation actually allowed meant the depreciation deducted in arriving at the taxable income. The present appeals filed by the revenue question the correctness of the answers given by the High Court in regard to questions Nos. 1 and 4 referred to it. Mr. A. V. Viswanatha Sastri, learned counsel for the revenue, argued that the assessee was only entitled to depreciation on the written down value calculated after deducting all the amounts of depreciation that had been taken into consideration in determining the world income. He argued that depreciation was allowed in respect of the user of the assets in the business, that the allowance did not depend on the assessable income and that the High Court, therefore, went wrong in striking a proportion on the basis of a part of the income actually assessed under the Indian Income-tax Act. Mr. Desai, learned counsel for the assessee, contended that no depreciation as such having been allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aws obtaining in the Part B State before the Act was extended to it shall be allowed. The proviso thereto says that when there is a conflict between the two rates, the greater of the two sums allowed shall be taken into account. The Explanation to the section defines the expression "all depreciation actually allowed under any laws or rules of a Part B State "to mean the aggregate allowances for depreciation taken into account in computing the written down value under the laws prevalent in the Part B State or carried forward under the said laws or rules. The argument turned upon the following expressions in the said paragraph : "actually allowed" in the main part of the paragraph; "allowed in the assessment" in the proviso and "taken into account in computing" in the Explanation. It is true that decided cases have given a very wide meaning to the word "assessment". It means sometimes "the computation of income"; sometimes, the determination of the amount of tax payable; and sometimes, the procedure laid down in the Act for imposing liability upon the taxpayer. The proviso used the word "assessment" both with reference to Part B States and also with reference to taxable territories. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual cost to the assessee and, in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the Act. The allowance towards depreciation is conditioned on the user of the assets, wholly or in part, during the accounting year and thus contributing to the earning of the income. Though it is not unrelated to the profits, it does not depend upon the increase or decrease in the earning capacity of the assets, but is only linked up with physical depreciation in their value. Even so, only the amount of depreciation actually allowed can be deducted from the original cost of the assets to ascertain the written down value. De hors such an allowance, it has no significance in the income-tax law. So the question is, what was allowed as depreciation by the income-tax authorities in the computation of the taxable income up to and inclusive of the year 1944 ? During the said years the assessee was taxed as a non-resident on the income which fell under section 4(1)(a) or under section 4(1)(c), read with section 42 of the Indian Income-tax Act. The assessee was, only assessed during the said years in respect of that pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards depreciation. The same illustration may also be put in another way: Rs. 25 is the gross income accrued in India to a non-resident Rs. 5 is the value of the depreciation on the total assets. By taking one-fourth of Rs. 5, i.e., Rs. 1.25, we get at the figure of Rs. 23.75, that is to say, only one-fourth of the amount representing depreciation is allowed in ascertaining the taxable income in India. It is, therefore, manifest that the Income-tax Officer, who applied the formula laid down in rule 33 of the Income-tax Rules, 1922, in fixing the depreciation allowance, had actually allowed only a fraction of the amount towards depreciation allowable in assessing the world income of the assessee. But the learned counsel for the revenue contended that 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. It appears that the Income-tax Officer in assessing the non-resident up to 1944 had, in calculating the total world income of the assessee, allowed the entire amount of depreciation; therea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian Income-tax Act, 1922, for some years as a resident and in others as a non-resident. The State of Indore became a part of the United State of Gwalior, Indore and Malwa in May, 1948, and the United State of Gwalior, Indore and Malwa became on January 26, 1950, a constituent State in the Indian Union as part of the Part B State of Madhya Bharat. The Finance Act, 1950, by section 13 repealed the taxation laws in force in the territories of the Part B States. In proceedings for assessment under the Indian Income-tax Act for the assessment years 1950-51, 1951-52, 1952-53 and 1953-54, the Income-tax Officer worked out the written down value of the buildings, plant and machinery of the company on January 1, 1949, by taking into account the depreciation allowed under the Indian Income-tax Act, 1922, till January 1, 1945, and thereafter, the depreciation allowed under the Indore Industrial Tax Rules, and assessed tax on that footing. The order of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The Tribunal referred under section 66(1) of the Indian Income-tax Act four questions to the High Court of Madhya Pradesh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which its British Indian income exceeded the income without British India, the company was treated as resident for the purpose of the Indian Income-tax Act, and in the other years it was treated as non-resident. In assessing income of the company under the Indian Income-tax Act in the years before 1950, the Income-tax Officer had, whether the company was assessed as resident or non-resident, to ascertain its world income, and for that purpose to take into account the depreciation allowable under section 10(2)(vi) read with section 10(5)(b). Depreciation allowance in respect of the profits of the company was therefore computed before the Indian Income-tax Act, 1922, was made applicable to the territory of the State of Indore by the Finance Act, 1950, under two different statutes---the Indian Income-tax Act, and the Indore Industrial Tax Rules, and in the assessment year 1950-51 there were two different sets of written down values of the buildings, plant and machinery of the company. To remove anomalies arising from the application of the Income-tax Act in the computation of taxable income of assessees from the Part B States, the Central Government issued under section 12 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if he was assessed under the Indian Income-tax Act as well as the State law, in determining the appropriate written down value, the proviso to paragraph 2 had to be applied, and depreciation actually allowed under the State law had to be compared with the depreciation actually allowed under the Indian Income-tax Act. The expressions "depreciation actually allowed under any law or rule of a Part B State" in the first clause, and the expression "depreciation has been allowed ... in the assessment in the Part B State" in the proviso have in relation to any year of assessment the same connotation. That is common ground. The point in dispute is about the true import of the expression "depreciation . . . allowed for any year ... in the taxable territories". The normal scheme of depreciation under the Income-tax Act is that depreciation progressively decreases every year, being a percentage of the written down value, which in the first year is the actual cost to the assessee, and in the years following the actual cost less all depreciation allowed under the Income-tax Act, 1922, or any Act repealed thereby : see section 10(5)(b). The Indore Industrial Tax Rules were, however, repealed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all depreciation actually allowed under any laws or rules of a Part B State' used in paragraph 2. The Appellate Assistant Commissioner and the Tribunal adopted this construction of the word 'allowed' as used in the proviso; but inconsistently with this they held that the words 'in the assessment made' used in the proviso indicated that it was the greater of the depreciation not actually allowed but taken into account against the total world income that was to be taken into account in computing the written down value under section 10(5)(b) after 1950. We are unable to agree with this view. The proviso has to be read with the substantive part of paragraph 2 and section 10(5)(b) and is concerned only with laying down the rule that the greater of the two depreciation allowances shall be taken into account." Under section 10 of the Income-tax Act taxable profits or gains earned by an assessee under the head "business" after making appropriate allowances under sub-section (2) have to be computed. One of such allowances is depreciation in respect of buildings, machinery, plant and furniture being the property of the assessee and used for the purpose of the business, at such percentage o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed with the Tribunal that in determining the depreciation allowed within the meaning of the proviso, it is wholly immaterial that a part of the total income was chargeable to tax "if depreciation has in fact been availed of by the assessee", is in my judgment correct. Reliance was sought to be placed upon rule 33 of the Indian Income-tax Rules by counsel for the company in support of his plea. The material part of the rule is : "In any case in which the Income-tax Officer is of opinion that the actual amount of the income, profits or gains accruing or arising to any person residing out of the taxable territories whether directly or indirectly . . . . . in the taxable territories . . . . cannot be ascertained, the amount of such income, profits or gains for the purposes of assessment to income-tax may be calculated on such percentage of the turnover so accruing or arising as the Income-tax Officer may consider to be reasonable, or on an amount which bears the same proportion to the total profits of the business of such person (such profits being computed in accordance with the provisions of the Indian Income-tax Act), as the receipts so accruing or arising bear to the total rec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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