PETITIONER: COMMISSIONER OF INCOME-TAX, BOMBAY Vs. RESPONDENT: DHARAMPUR LEATHER CLOTH CO. LTD., BOMBAY DATE OF JUDGMENT: 03/12/1965 BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C. CITATION: 1966 AIR 1117 1966 SCR (2) 859 CITATOR INFO : F 1968 SC 579 (12) ACT: Indian Income-tax Act, 1922 s. 10(5)(b)-Depreciation 'actually allowed'-Whether includes depreciation that might have been allowed if income had not been exempted. Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962--Company exempted by Ruler of Indian State from, taxation-After merger exemption given under para 15 of Merged States (Taxation Concession) Order, 1949- Exemption by Commissioner whether a continuation of the argeement with the Ruler. HEADNOTE: The respondent company obtained under an agreement with the Ruler of the erstwhile State of Dharampur an exemption from levy of income-tax and super-tax for the first seven years of its working. it commenced business in June 1949. In August 1949 the State of Dharampur merged with the Province of Bombay. The company then applied for and obtained under para 15 of the Merged States (Taxation Concession) Order, 1949, an exemption from income-tax and supper-tax for five years commencing from April, 1950. In the assessment year 1956-57 when the company was to be assessed under the Indian Incometax Act, 1922, for the first time, it claimed that as no depreciation had actually been allowed to it earlier the original cost of its machinery etc. should be taken as the written down value for the purpose of calculating the allowable depreciation. The assessing and appellate authorities held against the company but the High Court held in its favour. In appeal to this Court by the Revenue it was contended that (1) on a proper interpretation of s. 10(5)(b) of the Indian Income-tax Act, 1922 the depreciation must be deemed to, have been allowed to the assessee in the years in which its income was exempted and (2) the concession given by the Commissioner must be deemed to be a continuation of the agreement with the Ruler and therefore the Taxation Laws (Merged States) (Removal of difficulties) Order 1949 as amended by the Taxation Laws (Merged States) (Removal of Difficulties) (Amendment Order,), 1962 applied to the facts of the case. HELD: (i) The words 'actually allowed' in s. 10(5)(b) did not include any notional allowance and the High Court had rightly decided that the original cost was the written down value. [862 C] Commissioner of Income-tax, Madhya Pradesh v. M/s. Straw Products Limited, Bhopal, [1966] S.C.R. applied. (ii) The exemption granted to the company under para. 15 of the Merged States (Taxation Concession) Order, 1949 was an exemption under s. 60A of the Income-tax Act and not under any agreement. The case of the assessee had therefore to be determined with reference to s. 10(5)(b) of the Act unaffected by the amendment made by the 1962 Order. [862 G] JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 956 of 1964.
860
Appeal by special leave from the judgment and order dated
October 7, 9, 1961 of the Bombay High Court in I.T.
Reference No. 6 of 1960.
A. V. Viswanatha Sastri, Gopal Singh, B. R. G. K. A char
and R. N. Sachthey, for the appellant.
Mahinder Narain, Rameshwar Nath, S. N. Andley and P. L.
Vohra, for the respondent.
The Judgment of the Court was delivered by
Sikri, J. This appeal by special leave is directed against
the judgment of the High Court of Judicature at Bombay
answering the following question against the appellant :
“Whether depreciation is allowable on the
original cost of the various components of the
Plant and Machinery and other assets of the
company as acquired and used prior to 1-7-1953
?”
The relevant facts are these. We are concerned with the
assessment year 1955-56 (accounting year being April 1, 1954
to March 31, 1955). The respondent, Dharampur Leather
Company Ltd., Bombay, hereinafter referred to as the
assessee company, was incorporated on June 15, 1943, as a
private limited company, and later on November 24, 1949, it
became a public limited company. On August 1, 1949, the
Dharampur State merged with the Province of Bombay. Before
its incorporation, the promoters of the assessee company had
negotiated with the Ruler of Dharampur and secured from the
Ruler total exemption from the State Income Tax of profits
of the company for a period of seven years from the
commencement of its working. The factory commenced working
from June 15, 1949. After the merger the assessee company
applied to the Commissioner of Income Tax, Bombay, by its
letter dated June 22, 1951, for relief under para 15 of the
Merged States (Taxation Concessions) Order, 1949. The Com-
missioner of Income Tax communicated the decision of the
Government in his letter dated March 8, 1952, to exempt the
company from income tax and super tax for a period of five
years with effect from April 1, 1950. It was, however,
stated that the shareholders of the company would be liable
to pay tax on the amount of dividend received by them.
The Merged States (Taxation Concessions) Order, 1949, was
issued by the Central Government in exercise of the powers
conferred by S. 60A of the Indian Income Tax Act, 1922,
hereinafter
861
referred to as the Act, and s. 23A of the Business Profits
Tax Act, 1947. Para 15 of the said order provides as
follows :
“15(1) Where any industrial undertaking
situate in a merged State claims that it has
been granted any exemption from or concession
in respect of income-=, super-tax or business
profits tax by the Ruler of the State before
the 1st day of August, 1949, it shall submit
an application to the Commissioner of Income-
tax giving the following particulars :-
1. Name of the Industrial undertaking.
2. Status (i.e. whether public or private
company,
firm, individual or Hindu undivided family).
3. Nature of business.
4. Date of commencement of the business.
5. Nature of the concessions granted.
6. Period for which concessions granted.
7. Unexpired period of the concessions from
the 1st day
of August, 1949.
(2) The application shall be accompanied by
a copy of the orders of the State granting the
concession or of the agreement with the State.
(3) The Commissioner shall, after obtaining
such other information as he may require,
forward the application to the Central
Government which, having regard to all the
circumstances of the case, may grant such
relief, if any, as it thinks appropriate.”
The assessee company contended before the Income Tax Officer
in the course of the assessment proceedings for the assess-
ment year 1955-56 that this being the first assessment year
after it commenced working as a factory, no depreciation had
in fact been actually allowed to the assessee in any earlier
assessment year, and, therefore, the depreciation should be
computed on the original cost of the various items of plant
and machinery and other assets of the company. The Income
Tax Officer, however, rejected this contention and held that
depreciation must be computed on the written-down values of
machinery computed as if the income of the assessee had been
worked out properly in the years when the company was
exempted and the depreciation being allowed at the usual
rates. The assessee failed before the Appellate Assistant
Commissioner and the Appellate Tribunal. The Appellate
Tribunal held that the words “actually allowed” in s.
10(5)(b)
862
of the Act were wide enough to cover the case of the
assessee. The High Court, however, held that if in the
prior years no depreciation had been actually allowed then
the actual cost incurred by the assessee for acquiring the
machinery would be the written down value of the machinery.
Mr. Sastri, the learned counsel for the appellant, first
urges that on a proper interpretation of S. 10 (5) (b) of
the Act, the depreciation must be deemed to have been
allowed to the assessee in the years in which the income of
the assessee company was ,exempted. There is no force in
this contention. We have delivered judgment today in
Commissioner of Income Tax, Madhya Pradesh v. Messrs Straw
Products Limited Bhopal(1) and held that the words “actually
allowed” in para 2 of the Taxation Laws (Merged States)
(Removal of Difficulties) Order, 1949, did not include any
notional allowance. Following that judgment, we must
interpret the words ‘actually allowed’ occurring in s. 10(5)
(b) of the Act in the same manner.
Mr. Sastri next contends that the Taxation Laws (Merged
States) (Removal of Difficulties) Order, 1949, as amended by
the Taxation Laws (Merged States) (Removal of Difficulties)
(Amendment) Order, 1962, hereinafter referred to as 1962
Order, applies to the facts of the case. He says that the
exemption was ,originally given by the Ruler of Dharampur
State under an agreement with the assessee company and the
concession by the Commissioner of Income Tax vide his letter
dated March 8, 1952, was in fact a continuance of the
agreement, and therefore, this exemption must be deemed to
have been granted under an agreement with the Ruler, within
the meaning of 1962 Order. We are unable to accede to this
contention. In our opinion, the Explanation inserted by
1962 Order has no bearing on the facts of this ,case. The
exemption granted by the Central Government is granted under
para 15 of the Merged States (Taxation Concessions) Order,
1949, which was itself issued under s. 60A of the Act. The
result is that the exemption was granted under the Act and
not under any agreement. The case of the assessee must be
determined with reference to s. 10 (5) (b) of the Act,
unaffected by the amendment made by the 1962 Order.
In the result we agree with the High Court that the answer
to the question referred to should be in the affirmative.
The :appeal fails and is dismissed with costs.
Appeal dismissed.
(1) [1966] 2 S.C.R. 881.
863