Commissioner Of Income-Tax, Madhya Pradesh v. M/S. Nandlal Bhandari Mills Ltd

COMMISSIONER OF INCOME-TAX, MADHYA PRADESH M/S. NANDLAL BHANDARI MILLS LTD. December 7, 1965 [K. SUBBA RAo, J. C. SHAH AND S. M. SIKRI, JJ.] Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, Para 2, proviso-Depreciation allowed to non .. resident company in Part B States as well as in India-Fraction of total world income taken as Indian income-Depreciation allowed against total world income whether depreciation 'actually allowed' against Indian income-Computation of written down value after 1950. In the years prior to 1950 the respondent company with headquarters in the erstwhile state of Indore was assessed to tax under the Indore In-dustrial Rules, 1927 and also under the Indian Income-tax Act, 1922 in so far as its income fell with:n ss. 4(1)(a) and 4(1)(c) read withs. 42 of the Act. Depreciation had been allowed to it under the Indore In-dustrial Rules as we!! as the Indian Act. The written down value of its assets for the purpose of 1950-51 and subsequent assessments had to be determined under the Taxation Laws (Part B States) (Removal of DUii. culties) Order, 1950 wh'ch laid down in the proviso to paragraph 2 that 'where in respect of any a'8et, depreciation has been allowed for any year, both in the assessment made in the Part B State and in the taxable territories, the greater of the two sums allowed shall only be taken into account." The Income-tax Officer found that up to and including the year 1944 the sum allowed as depreciafon under the Indian Income-tax Act was larger and therefo-e in computing written down value as on 1-1-49 he took the sum allowed as depreciation under the Indian Act up to the end of 1944 and under the Indore Industrial Rules after that date. In the assessments made for the per:od up to the end of 1944 the respondent company had been treated as a non-resident and its taxable income under the Indian Income-tax Act had been worked out under Rule 33 of the Indian Income-tax Act, 1922 as a fraction of its total world income. In determining the total world income the depreciation claimable under the Indian Act had been allowed, and it was tbe full amount of this depreciation allowed against the total world income that the Income-tax Officer took into account in determining the written down value of the respondent company's assets for the purpose of the 1950.51 assesiment. The respondent company claimed that as only a fraction of the total world income had been treated as taxable income, therefore only a fraction of the depreciation allowed against the world income should be taken as having been 'actually allowed' in the terms of para-graph 2 of the Removal of fffficulties Order. The Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal having rejected this plea the m1tter went in reference to the High Court. That Court took the view contended for by the respondent viz. that only the proportionate amount of deoreciation which was attributable to the taxw able income could be taken °into account. The Revenue appealed to this Court. It was urged on behalf of the appellant that depreciation was allowed in respect of the use of the assets in the busine5', that the allowance did not depend on the as;e5'able income, and that the High Court therefore went wrong in striking a proportion on tbe basis of a part of the income actually assessed under the Indian Income-tax Act. The different expres-sions used in various parts of paragraph 2 of the Removal of Difficulties Order came for consideration. 928 H:ELD: Per Subba Rao and Sikri, JJ.-(i) The word "assessment" used in the proviso to paragraph 2 has been given a very wide meaning in decided cases. It means sometimes 'the computation of income'. sometimes the determination of the amount of tax payable; and some-time< the procedure laid down in the Act for imposing liability upon the tax-payer. The proviso used ihe word 'assessment' both with reference to Part B States and also with reference to the taxable territories. But in the present case the different shades of meaning of the said word were not relevant. For the purpose of computing the written down value, the amount of depreciation allowed fOr the purpose of the assessment only was relevant. [931 G-H; 932 A] (ii) The key to the understanding of paragraph 2 is the expression ·a11owed'. The expression 'actually allowed' in the main paragraph, 'allowed' in the proviso, and 'taken into account' in the Explanation mean the same thing. What the Incom"-tax Officer has to take into consideration in computing the written down value is the depreciation actually allowed under the Income-tax Act or the laws obtaining in Part B States and adopt the greater of the two sums so allowed under that head. The determination of the depreciation actuaUy allowed under the Income-tax Act for the years up to and including 1944 must depend on the provisions of that Act. f932 BJ (iii) Under the Income-tax Act depreciation allowance is in respect of such assets as are used in the business and shall be calculated on the written do~'n value, which means, in the case of assets acquired in the previous year, the actual cost to the assessee, and in the case of assets acquired before the previous year, the actual coot 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 de-pend 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 amount of depreciation actually allowed can be deducted from the original co-;t of the assets to ascertain the written down value. De hors such an allowance,. it has no significance in income-tax law. f932 F-H; 933 A-BJ 928 930 928 929 930 (iv) During the years up to and including 1944 the assessee was tax-ed a·s a non-reiident on the income which fell under s. 4(1) (a) or under s. 4(1) (c), read with s. 42 of the Indian Income-tax Act. The assessee was only assessed during the said years in re3pect of that part of its QWfits which could be said to be attributable to the sale proceeds or goods received in British India or in regard to wh~ch contracts were sign-ed in British India. Such income was brought to tax in terms of r. 33 of the Indian Income-tax Rules, 1922. The me'.hod adopted was that the amount of income for the purpose of Indian Income-tax was calcu-lated on· an amount which bore the same prooortion to the total profits of the busine1·s as the rece:p~s accruing or arisin~ in India bore to the total receiots of the bus;ness. By apolying the formula in r. 33 the Income-tax Officer had actu,lly allowed only a fraction of the amount towards denreciation ailowable in asse~sing the world income of the asse~see. The mere fact that in the matter of calculation the total amount o.f depreciation was first deducted from the world income and thereafter the' proportion was struck in ter~s. of _r. 33 doe~ _not amount to an actual allowance of the entire depreciation m ascertammg the tax- C. I. T. V, NANDLAL MILLS A able income accrued in India. The Income-tax Officer could have adopt-ed a different method by first ascertaining the gross income accrued in India and then deducting from it the allowance under the Act propor-tionate to the said income. Whatever method was adopted only a frac-tion of the total depreciation was actually allowed in ascertaining the taxable income in India. The view taken by the High Court was there-fore correct. [933 B-H[ Hakumchand Mills Ltd. v. Commissioner of Income-tax Bombay, (1963) 47 I.T.R. 949, endorsed. (Central) Per Shah, J. (dissenting)-Under s. 10 of the Income-tax Act taxable profits or gains earned by an assessee under the head 'business' after making appropriate allowances under 9Ub-s. (2) have to be computed. One of such allowances is depreciation in respect of the assets used for the purpose of business. But depreciation dete'rmined according to the mies merely enters into the computation of taxable profits, whether the assessee is a resident or a non-resident. In the assessment of a company the same rates of tax apply under the Income-tax Act, whether the com-pany is resident or non-resident. If the company is resident under s. 4A( c) its entire world income would be chargeable, subject of course to special exemptions like those provided in s. 14(2) (c) : if it is non-resident only a slice of the income would be chargeable. Under the scheme of the Indian Income-tax Act depreciation like any other allow-ance has to be allowed in computing the total profit; after the total profit is determined depreciation does not survive as a separate head of allow-ance. A part only of the total profit of a company determined in the manner prescribed by s. 10, may be taxable. But total profit being deter-mined after depreciation is allowed, between the taxable profits-which may be a fraction of total profits-and depreciation there is no definable relation. Therefore it is wrong to presume that the depreciation allowed in the taxable territories which is to be taken into account under the pro-viso to paragraph 2 of the Removal of Difficulties Order is a fraction of the depreciation considered for computing total profits. [940 E-H; 941 A-DJ 930 932 The fact that income was computed under r. 33 made no difference. In the ascertainment of total profits either for the purposes of assessment in the ordinary manner when the income of ·the assessee is determined or when a fraction is to be adopted for the purpose of the second method contemplated by s. 33, there is no scope for assum'ng that only a fcaction of the. depreciation is actually ·allowed. Depreciation is deducted only once and fur all. and it is deducted in determining the total profits of the business. [942B-D] There is therefore no warrant either in s. 10(2) (vi) or in paragraph 2 of the Removal'of Difficulties Order or in r. 33 framed under the Indian Income-tax Act for the view that the dep-eciation allowed is a frac-G tion of the total depreciation of the business. [942 HJ CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 629 to 632 of 1964. · Appeals from the order dated September 22 1961 of the Madhya Pradesh High Court in Mi~c. Civil C~se No. 277 of H 1960. A. V. Viswanatha Sastri, R. Ganapathy Iyer, B. R. G. K. Achar and R. N. Sachthey, for the appellant. S. T. Desai, T. A. Ramachandran, J. B. Dadachanji, for the respondent. The Judgment of SuBBA RAo and SrKRI, JJ. was delivered by SuBBA RAo, J. SHAH J. delivered a dissenting opinion. Sobba Rao, J. These appeals raise the question of construc-tion of the provisions of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, hereinafter called the Order, in the matter of computation of the aggregate deprecia-tion allowances for the purpose of assessment to tax. Nandlal Bhandari Mills Ltd., is a public company incorpo-rated in Indore under the Indore Companies Act, 1914. It C owns and runs a textile mill and some ginning factories. The Income-tax Officer assessed the Company for the assessment years 1950-51, 1951-52, 1952-53 and 1953-54 on its income of the corresponding accounting years, being the calendar years 1949, l950, 1951 and 1952. In the course of the assessments it became necessary to ascertain the written-down D value of the 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 resi-E dent 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-resi-dent under the Indian Income-tax Act, 1922, only that part of its profits which could be said to be attributable to the sale pro-ceeds of goods received in British India or in regard to which F contracts were accepted in British India was brought to tax. After the Indian Income-tax Act was extended to Indore, diffi-culties 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, G in order to rationalize the tax structure, the Central Government in exercise of the power conferred on it under s. 12 of the Fin-ance Act, 1950, issued the Order whereunder in the case of such disparity the greater of the two sums allowable was directed to be adopted. During the assessment years, pursuant to the terms of that Order, the Income-tax Officer took into account the depre-H ciation allowances for the years up to and including 1944 as computed under the Indian Income-tax Act, 1922, and for the 930 A subsequent years 1945 to