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PETITIONER:

MAHARANA MILLS PVT. LTD.

Vs.

RESPONDENT:

INCOME TAX TRIBUNAL, AHMEDABAD & ORS.

DATE OF JUDGMENT03/05/1989

BENCH:

PATHAK, R.S. (CJ)

BENCH:

PATHAK, R.S. (CJ)

KANIA, M.H.

CITATION:

1989 AIR 1719 1989 SCR (3) 1

1989 SCC Supl. (2) 210 JT 1989 (2) 399

1989 SCALE (1)1447

ACT:

Income Tax Act 1922--Sections 10(2)(vi) and 60A--Depre-

ciation allowance and written down value--Computation

of--Saurashtra Income Tax Ordinance 1949--Effect of.

HEADNOTE:

The appellant-assessee is a company carrying on the

business of manufacturing and selling Textile at Porbunder

(formerly a princely State) in Saurashtra in the State of

Gujarat. No income tax was levied by the former Porbunder

State prior to 1948. In 1949 the princely State of, Porbund-

er integrated into newly formed Saurashtra State. In 1949

the State of Saurashtra promulgated the Saurashtra Income

Tax Ordinance wherein provision for grant of depreciation

based on written down value was made. On 26.1.1950, State of

Saurashtra became a part of the Union of India as a Part 'B'

State and thus the Income Tax Act, 1922 became applicable to

the State of Saurashtra from 1st April 1950 under the Fi-

nance Act, 1950. The said Saurashtra Income Tax Ordinance

was repealed under Sec. 13 of the Finance Act, 1950. Section

12 of that Act provided for removal of difficulties, if any,

arising in giving effect to the Income Tax Act. The Central

Govt. on 2.12.50 issued an order known as "Taxation Laws

(Part B States) Removal of Difficulties) Order 1950". Clause

2 of the said order provided the manner in which the aggre-

gate depreciation allowance and written down value were to

be computed. On March 9, 1953, the Central Government in the

exercise of its powers under Sec. 60A of the Indian Income

Tax Act, 1922, added an Explanation to the said clause (2).

The vires of the said Explanation was challenged before the

Andhra Pradesh High Court which held that the Explanation

referred to above was ultra vires the powers of the Central

Government under Sec. 60A of the Income Tax Act.

Commissioner of Income-Tax, Hyderabad v. D.B.R. Mills

Ltd., [1956] 29 I.T.R. 210.

Thereupon, the Central Government issued another notifi-

cation dated the 8th May, 1956 in exercise of its powers

under Section 12 of the Finance Act 1950, whereby an Expla-

nation in identical terms as the earlier Explanation was

added to Clause (2) of the Removal of Difficulties Order,

1950. The validity of the said Explanation added by the

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notification dated 8th May, 1956 was upheld by this Court in

The Commissioner of Income-tax, Hyderabad v. Dewan Bahadur

Ramgopal Mills Ltd., [1961] 2 SCR 318. On the appeal from

the said decision of the High Court

2

of the Andhra Pradesh in Commissioner of Income-tax, Hydera-

bad v. D.B.R. Mills, [1956] 29 I.T.R. 210.

The assessee was assessed under the Indian Income Tax

Act from 1940-41 in respect of the income arising or deemed

to arise in British India from 1940-41 onwards. For these

years its income was assessed on receipt basis but in calcu-

lating the world income depreciation was taken into consid-

eration for arriving at the income outside British India.

The assessee was also assessed for the assessment year

1949-50 under the Saurashtra Income Tax Ordinance, 1949.

From 1950-51 it was assessed under the Income Tax Act. The

assessment years concerned in this case are 1957-58, 1958-59

and 1959-60, the corresponding previous years being the

Calender years 1956, 1957 and 1958 respectively. The case of

the assessee is that during the course of the assessment of

its income, depreciation was allowed for the assessment year

1950-51 and thereafter on the original cost of the assets as

reduced by the depreciation allowance given under the Sau-

rashtra Income Tax Ordinance 1949. The respective written

down values for the assessment years 1951-52 and 1952-53

were fixed on the basis of the written down value for the

assessment year 1950-51. But later the concerned Income Tax

Officer rectified the calculations of depreciation allowance

by further reducing the written down value of the assets of

the assessee. The Income Tax Officer took the written down

value for the assessment years 1940-41 as the starting

point.

The assessee was not satisfied with this rectification.

Its contention was that the depreciation for the previous

years should have been calculated only on the basis of

Clause (2) of the Taxation Laws (Part B States) (Removal of

Difficulties) Order 1950, which provided for computation of

the aggregate depreciation allowance on the basis of the

deduction which was actually allowed under the Saurashtra

Income Tax Ordinance, 1949. Regarding the explanation, the

assessee contended that it was ultra rites the powers of the

Central Government as it was not necessary for the removal

of any difficulty.

The contentions of the assessee were rejected by the

Income Tax authorities as well as by Income Tax Appellate

Tribunal. It was contended by the assessee before the Tribu-

nal that the decision of this Court in Commissioner of

Income Tax Hyderabad v. Dewan Bahadur Ramgopal Mills Ltd.,

[1961] 2 SCR 318 was no longer good law in view of the later

decision of this Court in Straw Products Ltd. v. Income Tax

Officer "A" Ward, Bhopal and Ors., [1968] 68, ITR 227. The

Tribunal having rejected the said contentions, at the in-

stance of the assessee a reference was made to the Gujarat

High Court in which the -following question was raised:

3

"Whether on the facts and in the circumstances

of the case. the Tribunal was justified in

holding that the depreciation allowable and

not 'actually allowed' under the Saurashtra

Income-tax Ordinance, 1949, should be taken

into account in computing the aggregate depre-

ciation allowance and written down value under

Sec. 10(2)(vi) of the Income Tax Act 1922."

The High Court held that in its advisory jurisdiction under

the Income Tax Act, it could not go into the question of the

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vires of the said Explanation and therefore answered the

question against the assessee. Therefore, the appellant

filed Special Civil Application 1797 of 1972 in the High

Court.

The Division Bench of the High Court in its judgment

disposing of the said special Civil Application pointed out

that the decision of this Court in the Commissioner of

Income Tax, Hyderabad v. Dewan Bahadur Ramgopal Mills, case,

referred to above had upheld the validity of the Explanation

in question. The High Court further opined that some of the

arguments which did not find favour with this court in the

said case were accepted by a Bench of 7 Learned Judges in

the Straw Products Ltd. v. Income- Tax Officer, "A" Ward,

Bhopal and Ors., [1968] 68 I.T.R. 227. The High Court fur-

ther pointed out that in its decision in the said case of

Straw Products this court had considered the decision in

Dewan Bahadur Ramgopal Mills Ltd. and explained that on the

facts of that case a difficulty had arisen and it was for

removing that difficulty that the Order of 1956 was issued.

For the said reason the High Court considered that decision

was good law and following the same, it dismissed the Spe-

cial Civil Application. Hence this appeal by the assessee.

In this appeal the Explanation added by the Central

Government by its notification dated May 8, 1956 as well as

the assessments made on the assessee for the assessment year

1957-58 to 1959-60 have been assailed. It was inter-alia

contended on behalf of the assessee that there was no diffi-

culty which had arisen in giving effect to the provisions of

the Indian Income Tax Act in the State of Saurashtra and

hence the pre-condition on which the Central Government was

authorised to make an Order under the Removal of Difficul-

ties Order and add the Explanation in question had never

come into existence and as such the Explanation was without

the authority of Law, invalid and of no legal effect. It was

further contended by the assessee that under the scheme of

the Income Tax Act, generally speaking, almost the entire

cost of a capital asset used for purposes of business or

profession should

4

be allowed to be written off by way of depreciation, whether

worked on the basis of straight line method or written down

value. The assessee disputed the mode of assessment and the

applicability of the Explanation.

Following this Court's decision in Dewan Bahadur Ramgo-

pal Mills' Ltd. [1961] 2 SCR 318 this Court dismissing the

appeal,

HELD: The Saurashtra Income Tax Ordinance was repealed

by Section 13 of the Finance Act 1950 and not by any provi-

sion in the Indian Income Tax Act. 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 deprecia-

tion actually allowed under the Income Tax Act or any Act

repealed thereby etc. [18D-E]

Commissioner of Income Tax Hyderabad v. Dewan Bahadur

Ramgopal Mills Ltd., [1961] 2 SCR 318.

The Saurashtra Income Tax Ordinance having been repealed

not by the Indian Income Tax Act but by Sec. 13 of the

Finance Act 1950, a difficulty had come into existence, and

hence it could not be said that the Government had no good

basis to come to the conclusion that a difficulty had, in

fact, arisen. [18F-G]

Madeva Upendra Sinai v. Union of India & Ors., [1975] 98

I.T.R.

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209.

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 612 (NT)

of 1975.

From the Judgment and Order dated 24/25.9. 1974 of the

Gujarat High Court in Special Civil Application No. 1797 of

1972.

Harish N. Salve, Mrs. A.K. Verma and Joel Pares for the

Appellant.

V.S. Desai, M.B. Rao and Ms. A. Subhashini for the

Respondents.

The Judgment of the Court was delivered by

KANIA, J. This is an appeal from the judgment of a Division

of

5

the High Court of Gujarat in Special Civil Application No.

1797 of 1972 on a certificate granted under Article 133(1)

of the Constitution of India. The relevant facts are as

follows:

The assessee is a Private Limited Company and carries on

the business of manufacturing and selling textile at Porbun-

dar in Saurashtra in the Gujarat State. Before 1948 Porbun-

dar was a part of the Princely State of that name. No In-

come-Tax was levied by the erstwhile Porbundar State prior

to 1948. In 1948 there was a merger of several Princely

States and as a result of the merger, the State of Saurash-

tra was formed. No income-tax was levied by the State of

Saurashtra till 1949 when it promulgated the Saurashtra

Income-tax Ordinance. Under that Ordinance provision was

made for the grant of depreciation allowance based on the

written down value. The said Ordinance defined "written down

value" as follows:

"Written down value" means:

(a) in case of assets acquired in the previous

year, the actual cost to the assessee; and

(b) in the case of assets acquired before the

previous year the actual cost to the assessee

less all depreciation actually allowed to him

under this Ordinance or allowed under an act

repealed thereby or which would have been

allowed to him if the Income-tax Act, 1922 was

in force in past."

On 26th January, 1950 State of Saurashtra

became a part of Union of India as a Part B

State. The Indian Income-tax Act, 1922 became

applicable to the State of Saurashtra from 1st

April, 1950 under the provisions of the Fi-

nance Act, 1950. By Section 13 of the Finance

Act of 1950, which provides for repeals and

savings, the Saurashtra Income-tax Ordinance

was repealed. Section 12 of that Act provided

for the removal of difficulties as follows:

"If any difficulty arises in giving effect to

the provisions of any of the Acts, rules or

orders extended by Section 3 or Section 11 to

any State or merged territory, the Central

Government may, by order, make such provision,

or give such direction, as appears to it to be

necessary for removing the difficulty."

In exercise of the powers conferred upon it by

Section 12 of the

6

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Finance Act, 1950, the Central Government

issued an order known as "Taxation Laws (Part

B States) (Removal of Difficulties) Order,

1950". Clause (2) of the Order of 1950 reads

as follows:

"Computation of aggregate depreciation allow-

ance and the written down value:

In making any assessment under the

Indian Incometax Act, 1922, all depreciation

actually allowed under any laws or rules of a

Part B State relating to Income-tax and

Super-tax or any law relating to tax on prof-

its 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.

Provided that, where in respect of

any asset, 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."

This order was made by the Central Govern-

ment on December 2, 1950. Subsequently, on

March 9, 1953, in exercise of the powers

conferred upon it by Section 60A of the Indian

Income-tax Act, 1922, an Explanation was added

by the Central Government to the above Clause

(2) of the Order of 1950 with effect from that

date and that Explanation was in the following

terms:

"For the purpose of this paragraph, the ex-

pression 'all depreciation actually allowed

under any laws or rules of a Part B State'

means and shall be deemed always to have meant

the aggregate allowance for depreciation taken

into account in computing the written down

value under any laws or rules of a Part B

State or carried forward under the said laws

or rules."

In Commissioner of Income-tax, Hyderabad v. D.B.R. Mills

Ltd., [1956] 29 I.T.R. 210 the Hyderabad High Court held

that this Explanation was ultra vires the powers of the

Central Government under Section 60A of the Indian Income-

tax Act, 1922. After the said decision of the High Court the

Central Government issued a notifica-

7

tion on 8th May, 1956 in exercise of the powers conferred

upon it by Section 12 of the Finance Act, 1950 and under

this notification an Explanation in identical terms as the

earlier Explanation inserted by an order made under Section

60A of the Indian Income-tax Act, 1922 was added to Clause

(2) of the Removal of Difficulties Order, 1950. As far as

the appellant-assessee is concerned, it was assessed under

the Indian Income-tax Act from 1940-41 in respect of the

income arising or deemed to arise in British India from

1940-41 onwards. For these years income of the assessee was

computed on receipt basis, but in calculating the world

income, depreciation was taken into consideration for arriv-

ing at the income outside British India. The assessee was

also assessed for assessment year 1949-50 under the Saurash-

tra Income-tax Ordinance, 1949. From the assessment year

1950-51 onwards the assessee was assessed under the Indian

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Income-tax Act, 1922 (referred to hereinafter as "the Indian

Income-tax Act"). The assessment years with which we are

concerned are the assessment years 1957-58, 1958-59 and

1959-60, the corresponding previous years being the calendar

years 1956, 1957 and 1958 respectively. It is the case of

the assessee that during the course of the assessment of the

assessee's income under the Act of 1922, depreciation was

allowed for the assessment year 1950-51 and thereafter on

the original cost of the assets as reduced by the deprecia-

tion allowance given under the Saurashtra Income-tax Ordi-

nance, 1949. The respective written down values for assess-

ment years 1951-52 and 1952-53 were fixed on the basis of

the written down value for assessment year 1950-51. However,

subsequently, the Income-tax Officer concerned having juris-

diction over the case of the petitioner, rectified the

calculations of depreciation allowance by further reducing

the written down value of the assets of the assessee by

adopting the procedure which has been set out in paragraph 7

of the petition filed by the assessee. What was done by the

Income-tax Officer was that the written down value taken for

the assessment year 1940-41 by the Income-tax Officer,

Bombay was taken as the starting point. From this written

down value, the depreciation that was actually allowed to

the assessee in respect of the assessment years 1940-41 to

1944-45 was deducted. For the assessment years 194546 to

1948-49 the written down value was calculated after calcu-

lating the depreciation allowance which would be allowable

under the rules. For the assessment year 1949-50, the depre-

ciation allowance as calculated under the Saurashtra

Income-tax Ordinance, 1954 was deducted. For the assessment

years 1950-51 to 1952-53, the depreciation allowance actual-

ly deducted under the assessment orders passed under the

Indian Income-tax Act was calculated and for the assessment

year 1953-54 the depreciation allowance was calculated under

Rule 8 of the

8

Indian Income-tax Rules made under the Indian Income-tax

Act. For the assessment years 1954-55 to 1956-57 the depre-

ciation was calculated on the basis of the above rectifica-

tion order. The contention of the assessee is that the

depreciation for the previous years should have been calcu-

lated only on the basis of Clause (2) of the Taxation Laws

(Part B States) (Removal of Difficulties) Order, 1950, which

provided for computation of the aggregate depreciation

allowance on the basis of the deduction which was actually

allowed under the provisions of Saurashtra Income-tax Ordi-

nance, 1949. Regarding the Explanation which was added as

set out earlier, the contention of the assessee was that it

was ultra vires the powers of the Central Government as it

was not necessary for the removal of any difficulty. This

contention of the assessee was rejected by the Income-tax

authorities as well as the Income-tax Appellate Tribunal.

For the assessment years 1957-58 and 1959-60 the assessee

again contended before the Income-tax authorities and the

Tribunal that Explanation to Clause (2) as notified in 1956

was ultra vires the powers of the Central Government. It was

contended by the assessee before the Tribunal that the

decision of this Court in The Commissioner of Income-tax,

Hyderabad v. Dewan Bahadur Raingopal Mills Ltd., [1961] 2

S.C.R. 318; (1961) 41 I.T.R. 280 which upheld the validity

of the Explanation was no longer good law in view of the

decision of this Court in Straw Products Ltd. v. Income-tax

Officer. "A" Ward, Bhopal, and Ors., [1968] 68 I.T.R. 227.

The contention of the assessee was rejected by the Tribunal

by its order dated April 16, 1969. From this decision of the

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Tribunal at the instance of the assessee a reference was

made to the Gujarat High Court in which the following ques-

tion was raised:

"Whether on the facts and in the circumstances

of the case, the Tribunal was justified in

holding that the depreciation allowable and

not 'actually allowed' under the Saurashtra

Income-tax Ordinance, 1949 should be taken

into account in computing the aggregate depre-

ciation allowance and written down value under

Section 10(2)(vi) of the Income-tax Act,

1922?"

This reference was numbered as Reference No. 45 of 1970.

On August 17, 1972 the High Court held that in its advisory

jurisdiction under the Income-tax Act it could not go into

the question of the vires of the said Explanation and an-

swered the question against the assesee. Thereafter the

assessee filed Special Civil Application No. 1797 of 1972

from the decision wherein this appeal arises. In this Spe-

cial Civil Application the vires of the Explanation added by

the Central Government by its

9

notification dated May 8, 1956 in exercise of the powers

under Section 12 of the Finance Act of 1950 as well as the

assessments made on the assessee for the assessment years

1957-58 to 1959-60 were challenged. The Division Bench of

the Gujarat High Court in its impugned judgment pointed out

that the decision of this Court in The Commissioner of

Income-tax, Hyderabad v. Dewan Bahadur Ramgopal Mills Ltd.,

had upheld the validity of the said Explanation. The Gujarat

High Court noted that the decision of this Court in Straw

Products Ltd. v. Income-tax Officer, arose from the merged

State of Bhopal. Some of the arguments which did not find

favour with this Court in the case of The Commissioner of

Income-tax, Hyderabad v. Dewan Bahadur Ramgopal Mills Ltd.,

were accepted by a Bench of seven learned Judges of this

Court in the case of Straw Products. The Gujarat High Court

pointed out that in its decision in the case of Straw

Products, this Court had considered the decision in the case

of Dewan Bahadur Ramgopal Mills Ltd., and explained that

decision by stating that the Supreme Court was satisfied

that on the facts of that case a difficulty had arisen and

it was for removing that difficulty that the Order of 1956

was issued. The Division Bench of the Gujarat High Court

considered the decision of this Court in Dewan Bahadur

Raingopal Mills Ltd., as binding and following the same

dismissed the Special Civil Application filed by the asses-

see.

Mr. Salve made two submissions before us. The first

submission made by him was the same as made on behalf of the

assessee before the High Court, namely, that there was no

difficulty which had arisen in giving effect to the provi-

sions of the Indian Income-tax Act in the State of Saurash-

tra and hence the pre-condition on which the Central Govern-

ment was authorised to make an order under the Removal of

Difficulties Order and add the Explanation had never come

into existence and hence adding of the Explanation was

without any authority of law and invalid and no legal ef-

fect. The next submission urged by Mr. Salve was that it is

the fundamental scheme of the Indian Incometax Act that,

generally speaking, almost the entire cost of a capital

asset used for purposes of business or profession should be

allowed to be written off by way of depreciation. This could

be done in more than one ways. It could be done by allowing

a fixed percentage of the actual cost to be deducted as

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depreciation allowance every year till the entire cost is

written off. This is known as the Straight Line Method. The

other is the method of calculating the depreciation on the

basis of written down value. Written down value would be

determined by deducting a fixed percentage of the original

cost of the asset in assessment year relevant to the previ-

ous year in which the asset was

10

acquired and thereafter giving the same percentage of the

written down value determined on the footing of the original

cost less the depreciation already allowed. Taking into

account the definition of the term "written down value"

contained in Section 10 of sub-section (5) of Indian

Income-tax Act, 1922, the basic scheme under the said Act

appears to be that in determining the written down value for

depreciation allowance, the taxing authority can deduct only

such amounts as have been allowed earlier by way :of deduc-

tion. It was submitted by him that this position was accept-

ed in the decision of this Court in Straw Products Ltd. v.

Income-tax Officer. In the present case, if the impugned

Explanation was applied, the result would be that the writ-

ten down value of the capital asset of the assessee acquired

prior to 1949 would be determined by making deductions for

depreciation allowance which was not actually allowed to the

assessee between the assessment years 1945-46 to 1948-49.

This result would follow from the manner in which the writ-

ten down value was calculated under the Saurashtra Income-

tax Ordinance of 1949. It was urged by him that in exercise

of its delegated powers it was not open to the Central

Government to enact such an Explanation. In order to examine

this contention it would be useful to bear in mind some of

the provisions of the Indian Income-tax Act. In that Act the

charge of Income-tax is in respect of "total income" of the

previous year. The expression "total income", very briefly

stated, is defined in sub-section (15) of Section 2 as

meaning the total amount of income, profits and gains com-

puted in the manner laid down in the Act. Chapter 3 of the

Act deals with the various Heads of Income chargeable to

Income-tax and Section 10 deals with the Head of Income in

respect of profits or gains of business, profession or

vocation carried on by the assessee. Sub-section (2) of

Section 10 deals with the allowances which have to be made

in the computation of the profits and gains from business,

profession or vocation and Clause (vi) of the said sub-

section provides for depreciation. The relevant portion of

Clause (vi) ran as follows:

"In respect of depreciation of such buildings,

machinery, plant or furniture being the

property of the assessee, a sum equivalent

where the assets are ships other than ships

ordinarily plying on inland waters to such

percentage on the original cost thereof to the

assessee as may in any case or class of cases

be prescribed and in any other case, to such

percentage on the written down value thereof

as may in any case or class or cases be pre-

scribed."

The expression "written down value" as used in

sub-section (2)

11

of Section 10 of the Act has been defined in

sub-section (5) of Section 10. The relevant

part of Clause (b) of the said sub-section

runs as follows:

"In the case of assets acquired before the

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previous year the actual cost to the assessee

less all depreciation actually allowed to him

under this Act, or any Act repealed thereby,

or under executive orders issued when the

Indian Income-tax Act, 1886 (II of 1886), was

in force.

X X X

X

Provided that in the case of a

building previously the property of the asses-

see and brought into use for the purposes of

the business, profession or vocation after the

28th day of February, 1946, 'written down

value' means the actual cost to the assessee

reduced by an amount equal to the depreciation

calculated at the rate in force on that date

that would have been allowable had the build-

ing been used for the aforesaid purposes since

the date of its acquisition by the assessee

and had the provisions of this Act relating to

the allowance for depreciation been in force

on and from the date of acquisition."

In The Commissioner of Income-tax, Hyderabad v. Dewan

Bahadur Ramgopal Mill Ltd., the very Explanation added by

the notification dated 8.5.1956, which is challenged before

us, came up for consideration before a Constitution Bench of

this Court.

The facts in that case were that prior to January 26,

1950, when the erstwhile State of Hyderabad merged in the

Union of India and became a Part B State, the respondent

company was assessed to Income-tax under the Hyderabad

Income-tax Act, under which depreciation allowance was given

to it on the basis of the written down value of its assets,

such as buildings, machinery plants, etc., in accordance

with clause (c) of section 12(5) of that Act, which provided

that in the case of assets acquired before the previous year

and before the commencement of the Act, the written down

value would be the actual cost to the assessee less (i)

depreciation at the rates applicable to the assets calculat-

ed on the actual costs for the first year since acquisition

and for the next year on the actual cost diminished by the

depreciation allowance for one year and so on, for each year

upto the commencement of that Act and (ii) depreciation

actually allowed to the assessee

12

on such assets for each financial year after the commence-

ment of the Act. After the merger of Hyderabad with the

Union of India, by sections 3 and 13 of the Finance Act,

1950, the taxation laws in force in that State were repealed

and the Indian Income-tax Act, 1922, was extended to that

area; and, in exercise of the powers conferred by section 12

of the Finance Act, 1950, the Central Government issued a

notification dated December 2, 1950, called the Taxation

Laws (Part B States) (Removal of Difficulties) Order, 1950.

Paragraph 2 of the Order provided that "in making any as-

sessment under the Indian Income-tax Act, 1922, all depreci-

ation actually allowed under any laws or rules of a Part B

State ........ shall be taken into account in computing

the aggregate depreciation allowance referred to in proviso

(c) to section 10(2)(vi) and the written down value under

section 10(5)(b) of the said Act".

For the assessment year 195 1-52 the respondent was

assessed for the first time under the Indian Income-tax Act,

and basing its claim on paragraph 2 of the aforesaid Order

it asked for depreciation allowance in respect of its assets

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by working out the value thereof at their inception and

deducting therefrom such depreciation as was allowed for the

three assessment years in which it was assessed under the

Hyderabad Income-tax Act. By an order dated November 30, 195

1, the Incometax Officer disallowed the respondent's claim

on the ground that it was against the principle inherent in

granting depreciation allowance which must decrease from

year to year. The matter was taken up to this Court and

while it was pending there, on May 8, 1956, the Central

Government issued a notification in exercise of its powers

conferred on it by section 12 of the Finance Act, 1950,

whereby an Explanation was added to the aforesaid paragraph

2 as follows:

"For the purpose of this paragraph, the ex-

pression 'all depreciation actually allowed

under any law or rules of a Part B State'

means and shall be deemed to have always meant

the aggregate allowance for depreciation taken

into account in computing the written down

value under any laws or rules of a Part B

State or carried forward under the said laws

or rules."

The respondent challenged the validity of the notification

of 1956 and also its applicability to the present case on

grounds (1) that it was ultra vires the powers conferred on

the Central Government by section 12 of the Finance Act,

1950, (2) that it contravened Article 14 of the Constitu-

tion, and (3) that, in any case, it could have no retrospec-

tive effect.

13

It was held by this Court that the true scope and effect of

Section 12 of the Finance Act, 1950 was that it was for the

Central Government to determine if any difficulty of the

nature indicated in the section arises and then to make such

order or give such direction, as appeared to it to be neces-

sary to remove the difficulty, the legislature having left

the matter to the executive.

In the present case, a difficulty had arisen because if

depreciation actually allowed under the Hyderabad Income-tax

Act was taken into account in computing the aggregate depre-

ciation allowance and the written down value, an anomalous

result would follow, namely, depreciation allowance to be

allowed to the assessee in the accounting year under the

Indian Income-tax Act would be more than what was allowed in

previous years under the Hyderabad Income-tax Act. Conse-

quently, the Central Government was within its power under

section 12 in making the notification dated May 8, 1956.

It was also held that the notification of 1956 applied

to all those to whom paragraph 2 of the Taxation Laws (Part

B States) (Removal of Difficulties) Order, 1950, was ap-

plicable and created no unequal treatment of persons in the

like situation. Accordingly, the notification did not con-

travene Article 14 of the Constitution. In the course of the

leading judgment, S.K. Das, J., set out the chain of events

which led to the notification dated May 8, 1956 under sec-

tion 12 of the Finance Act, 1950 being issued which we have

already set out earlier and went on to state as follows:

"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. The Hyderabad Income-tax

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Act not having been repealed by the Incometax

Act but by the Finance Act, 1950, there was a

difficulty in allowing depreciation to an

assessee in a Part B State in the first year

of assessment under the Indian Income-tax Act.

This difficulty was sought to be removed by

paragraph 2 of the Removal of Difficulties

Order, 1950. If however, depreciation actually

allowed under the Hyderabad Income-tax Act was

taken into account in computing the aggregate

depreciation allowance and the written down

value, an anomalous result would follow as in

the present

14

case, namely, depreciation allowance to be

allowed to the assessee in the accounting year

under the Indian Incometax Act would be more

than what was allowed in previous years under

the Hyderabad Income-tax Act. This would

create a disparity and be against the scheme

of the Indian Income-tax Act. It was therefore

necessary to explain paragraph 2 of the Remov-

al of Difficulties Order, 1950, to assimilate

or harmonise the position regarding deprecia-

tion allowance, and the Explanation added in

1953 or 1956 was obviously intended to remove

the difficulty arising out of that disparity

or disharmony."

It is not disputed that, if this decision is to fol-

lowed, both the contentions urged by the learned Counsel,

Mr. Salve before us must be negatived. The decision clearly

lays down that a difficulty had come into existence and the

Central Government had, in exercise of the power delegated

to it, issued the said notification in 1956 adding the said

Explanation to resolve the difficulty. The Court took the

view that, under the scheme of the Indian Income-tax Act, in

respect of assets acquired before the relevant previous

year, depreciation is to be allowed on the basis of the

original cost less depreciation in respect of earlier years.

viz., the years intervening between the relevant previous

year and the year of acquisition. Where any tax on income

was levied during any of these intervening years, the actual

cost would have to be reduced by the depreciation actually

allowed but in respect of such intervening years when there

was no tax levied on income, depreciation on a notional

basis would have to be deducted from the actual cost of the

asset. In deducting an amount on account of such notional

depreciation there seems to be nothing against the basic

scheme of the Income-tax Act. These are the conclusions

which flow from the said decision of Court in the case of

Dewan Bahadur Ramgopal Mills Ltd.. The said decision has

been rendered by a Bench comprising five learned Judges of

this Court and must normally be regarded as binding. upon

us. The question, however, is whether the said decision

needs to be reconsidered in view of two later decisions of

this Court which we shall presently discuss. The first of

the said two decisions cited by Mr. Salve is that in the

case of Madeva Upendra Sinai v. Union of India & Ors.,

[1975] 98 I.T.R. 209. The said decision has been rendered by

majority comprising four learned Judges out of five compris-

ing the Bench which decided the case. In that case, the

challenge was to the validity of the second Proviso to

Clause (2) of the Taxation Laws (Extension to Union Territo-

ries) (Removal of Difficulties) Order No. 2 of 1970 which

was deemed to have come into force on 1st April,

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15

1963. In brief, this clause provided that in making any

assessment under the Indian Income-tax Act, 1961 all depre-

ciation actually allowed under the local laws shall be taken

into account in computing the written down value. The second

Proviso to that Clause was as follows:

"Provided further that where in respect of any

period, no depreciation was actually allowed

under the local law or the depreciation actu-

ally allowed cannot be ascertained, deprecia-

tion in respect of that period shall be calcu-

lated at the rate for the time being in force

under the Income-tax Act, 1961 or under the

Indian Income-tax Act, 1922 ........ and the

depreciation so calculated shall be deemed to

be the depreciation actually allowed under the

local law".

The majority judgment took the view that the existence

or arising of a difficulty was the sine qua non for the

exercise of the power under Clause (7) of the Taxation Laws

(Extension to Union Territories) Regulation, 1963. The

"difficulty" contemplated by that clause had to be a diffi-

culty arising "in giving effect to" the provisions of the

Act, etc., and not a difficulty arising aliunde or an extra-

neous difficulty. Further, the Central Government could

exercise the power under the clause only to the extent it

was necessary for applying or giving effect to the Act,

etc., and no further. The second Proviso to Clause (2) of

the said Order of 1970 sought to raise the taxable income of

the assessee inconsistently with the scheme of the Income-

tax Act, and was ultra vires the Central Government under

Clause 7 of the 1963 Regulation and the Revenue was not

entitled to lay tax on the basis of the depreciation allow-

ance computed in accordance with that proviso. It was fur-

ther held that the said second proviso to Clause (2) of the

1970 order would, in the implementation of the Act, create

difficulties rather than remove them. It was further held

that the key word in Clause (b) of Section 43(6) of the

Income-tax Act, 1961 is "actually". 11 is the antithesis of

that which is merely speculative, theoretical or imaginary.

"Actually" contra-indicates a deeming construction of the

word "allowed" which it qualifies. It cannot be stretched to

mean "notionally allowed" or merely allowable on a notional

basis. In Straw Products Ltd. a challenge was made to the

validity of sub-clause (b) of paragraph 2 of the Taxation

Laws (Merged States) (Removal of Difficulties) Order, 1949

inserted therein by the Taxation Laws (Merged States)

(Removal of Difficulties) Amendment Order, 1962.1t was held

that the said sub-clause of the said Explanation was ultra

vires

16

the Central Government under Section 6 of the Taxation Laws

(Extension to Merged States and Amendment) Act, 1949 under

which it was purported to be made, since no "difficulty" was

proved to have arisen justifying the invocation of the power

under Section 6; and the revenue authorities were not enti-

tled to levy tax on the basis of depreciation allowance

computed in accordance with sub-clause (b) of the said

Explanation to paragraph 2 of the Order. It was held that

the expression "depreciation actually allowed" connotes

under Section 10(2)(vi) of the Indian Income-tax Act, 1922

under Clause (2) of the Taxation Laws (Merged States)

(Removal of Difficulties) Order, 1949 and the notification

under Section 60A of the Income-tax Act, depreciation taken

into account in assessing the income of an assessee arising

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from carrying on business, and does not mean depreciation

merely allowable or applicable under the taxing provision

(68 I.T.R. 227 at p. 236). The Court took the view that the

exercise of the power under Section 6 of the Taxation Laws

(Extension to Merged States and Amendment) Act, 1949 to make

provisions or to issue directions as may appear necessary to

the Central Government is conditioned by the existence of a

difficulty arising in giving effect to the provisions of any

Act, rule or order extended by Section 3 to the Merged

States. The Section does not make the arising of a difficul-

ty 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 estab-

lished as an objective fact. It may be mentioned that the

decision in the case of The Commissioner of Income-tax,

Hyderabad v. Dewan Bahadur Ramgopal Mills Ltd., was noticed

and discussed in this judgment but it was pointed out that

in that case the difficulty had arisen because, as pointed

out by the Court in that case but for the Explanation a

difficulty would have arisen insofar as the depreciation

allowance allowed to assessee under the Indian Income-tax

Act would have been more than the depreciation allowance

under the Hyderabad Income-tax Act.

After giving our anxious consideration to the matter, we

find ourselves unable to accept the submissions of Mr.

Salve, learned Counsel for the assessee. As pointed out by

us earlier, it was frankly conceded by the learned Counsel

that unless we took the view that the decision of this Court

in The Commissioner of Income Tax, Hyderabad v. Dewan Baha-

dur Ramgopal Mills Lid, was not good law or, at least, that

it needed reconsideration by a larger Bench, we must follow

that decision and the appeal of the assessee must be dis-

missed. It is the undisputed position that the very provi-

sion which is challenged before us was earlier challenged

before a Constitution Bench of this Court in

17

the aforementioned case and that challenge was negatived.

The mainplank of learned Counsel's argument is that in the

case of Straw Products Ltd. v. Income-tax Officer, a view

has been taken which is inconsistent with the view taken in

The Commissioner of Income-tax, Hyderabad v. Dewan Bahadur

Ramgopal Mills Ltd. Now, in fact, we find that a Bench

comprising seven learned Judges of this Court in this case

of Straw Products Ltd. has considered the decision of this

Court in Dewan Bahadur Ramgopal Mills Ltd. and has observed

that the case could be distinguished because in that case

there was a difficulty which had, in fact, arisen and hence,

it was necessary to issue the Removal of Difficulties Order,

1956. The observations of this Court in that case (at page

237 to 238 of the aforesaid Report) only show that this

Court disapproved the interpretation given to the decision

in the case of Dewan Bahadur Ramgopal Mills Ltd. by the

Madhya Pradesh High Court, namely, that it was a matter for

subjective satisfaction of the Government to decide whether

a difficulty has arisen and it was not open to the Court to

investigate that question. It was pointed out that in Dewan

Bahadur Ramgopal Mills Ltd. this Court was satisfied that,

in fact a difficulty had arisen and that difficulty had to

be removed and for removing the difficulty, the Order of

1956 was issued. On a fair reading of the decision in the

case of Straw Products along with the decision in the case

of Dewan Bahadur Ramgopal Mills Ltd., it appears to us that

the view taken in Straw Products Ltd., is that although it

is for the Government to subjectively satisfy itself that a

difficulty has arisen of the kind set out in those decisions

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before an order can be issued under the power to issue

orders for removal of difficulties but that satisfaction is

not conclusive as suggested by the High Court of Madhya

Pradesh and it is the duty of the Court concerned to examine

for itself whether there was a reasonable basis for the

Government to have come to such a conclusion. Anyway, al-

though it is not for the Court to determine for itself in

the first instance whether such a difficulty, as contemplat-

ed, had arisen, it is open to the Court to see whether the

Government had a sound basis to come to the conclusion that

such a difficulty had arisen. The decision in the case of

Straw Products, therefore, in no way casts doubt the deci-

sion of this Court in Dewan Bahadur Ramgopal Mills Ltd. The

other case relied upon by Mr. Salve. namely, Madeva Sinai v,

Union Of India has cast no doubt whatever on the decision of

this Court in Dewan Bahadur Ramgopal Mills Ltd. but the

Court there took the view that the existence of a difficulty

was sine qua non for the exercise of the power in Clause 7

of the Taxation Laws (Extension to Union Territories)

(Removal of Difficulties) Regulation, 1963.

18

It is not disputed that the decision of the Constitution

Bench of this Court in the case of Dewan Bahadur Ramgopal

Mills Ltd. is binding on us. In the light of what we have

discussed earlier, we do not feel that it is necessary to

direct this matter to be placed before a larger Bench so

that the decision in Dewan Bahadur Ramgopal Mills Ltd.,

could be reconsidered. In fact, in the case of Straw

Products a larger Bench of this Court did consider that

decision and came to the conclusion that on the facts of

that case the decision was correct. In view of this, we fail

to see how any useful purpose would be served by referring

this appeal to a larger Bench. Moreover, problems of the

type which have arisen in these cases are not likely to

recur hereafter except very rarely. In view of this, we

would prefer to follow the decision in The Commissioner of

Income-tax Hyderabad v. Dewan Bahadur Ramgopal Mills Ltd.

and the appeal of the assessee must stand dismissed.

Even apart from what we have stated in the foregoing

paragraph, we may point out that in the present case, the

Saurashtra Income-tax Ordinance was repealed by Section 13

of the Finance Act, 1950 and not by any provision of the

Indian Income-tax Act. As observed in the case of The Com-

missioner of Income Tax, Hyderabad v. Dewan Bahadur Ramgopal

Mills Ltd. (at page 326) 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 Indian Income-tax Act or any Act repealed

thereby, etc. In that case, an anomalous situation arose

because the Hyderabad Income-tax Act was not repealed by the

Indian Income-tax Act but by the Finance Act, 1950 and

hence, a difficulty arose in allowing depreciation to an

assessee in Part B State. In the present case also, the

Saurashtra Income-tax Ordinance having been repealed not by

the Indian Income-tax Act but by Section 13 of the Finance

Act, 1950, a similar difficulty had come into existence, and

hence we fail to see how it can be said that the Government

had no good basis to come to the conclusion that a difficul-

ty had. in fact, arisen as contemplated in the case of Dewan

Bahadur Ramgopal Mills Ltd.

In the result, the appeal fails and is dismissed. Howev-

er, considering the facts and circumstances of the case,

there will be no order as to costs.

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Y.L. Appeal dis-

missed.

19