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Hukumchand Mills Ltd. Vs. Commissioner of Income-tax (Central), Bombay - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 34 of 1960
Judge
Reported in[1963]47ITR949(Bom)
ActsIncome Tax Act, 1922 - Sections 4(1) and 42; Income Tax Rules, 1922 - Rule 33; Taxation Laws (Removal of Difficulties) Order, 1950
AppellantHukumchand Mills Ltd.
RespondentCommissioner of Income-tax (Central), Bombay
Appellant AdvocateN.A. Palkhivala, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
.....section 10 (5) (b) refer only to depreciation allowed for purpose of determining amount liable to indian income-tax - section 10 provides for computation of profits or gains of business on which tax is to be paid under act - in computation of these profits certain deductions and allowances allowed from gross profits and one of such deductions is depreciation of business assets - calculation of amount permissible as deduction by way of depreciation is made on written down value of assets - method of fixing written down value of assets rule provided by section 10 (5) (b) - where assets acquired before previous year - written down value will be actual cost to assessee less all depreciation actually allowed to assessee under act in prior amount deducted under section 10 in earlier years -..........1950-51, 1951-52 and 1952-53 have been referred to us on this reference under section 66(1) of the indian income-tax act. the questions relates to the determination of the written down value of the assets of the assessee and are as follows : '(1) whether the words 'all depreciation actually allowed' used in section 10(5) (b) of the indian income-tax act refer only to the depreciation allowed for the purpose of determining the amount liable to indian income-tax (2) whether the provisions of paragraph 2 of the taxation laws (part b states) (removal of difficulties) order, 1950, apply and were correctly applied to the facts of the case ?' 2. the assessee is a public limited company incorporated in the former indore state. up to and inclusive of the assessment year 1949-50, except for the.....
Judgment:

V.S. Desai, J.

1. Two questions arising out of the assessment of the assessee for the assessment years 1950-51, 1951-52 and 1952-53 have been referred to us on this reference under section 66(1) of the Indian Income-tax Act. The questions relates to the determination of the written down value of the assets of the assessee and are as follows :

'(1) Whether the words 'all depreciation actually allowed' used in section 10(5) (b) of the Indian Income-tax Act refer only to the depreciation allowed for the purpose of determining the amount liable to Indian income-tax

(2) Whether the provisions of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, apply and were correctly applied to the facts of the case ?'

2. The assessee is a public limited company incorporated in the former Indore State. Up to and inclusive of the assessment year 1949-50, except for the assessment year 1948-49, the assessee was for a number of years taxed under the Indian Income-tax Act in the status of a non-resident on such income as fell within section 4(1) (a) or section 4(1) (c) read with section 42 of the Indian Income-tax Act. For and from the assessment year 1950-51, the assessee has been a resident since the Indian Income-tax Act had been made applicable to what was formerly the Indore State, after its merger, by the Indian finance Act of 1950. During the assessments for the assessment years 1950-51, 1951-52 and 1952-53, a question arose as to what depreciation the assessee was entitled to on his assets which were a textile mill at Indore. The contention of the assessee was that the written down value of his assets since no depreciation as such had been allowed in the prior years. In order to understand the contention, it would be necessary to state a few facts. In the years prior to the assessment year, 1950-51, the assessee, as we have already stated, was taxed as a non-resident except for one year on the income which fell under section 4(1) (a) or under section 4(1) (c) read with section 42. Now, in order to determine the status of the assessee, i.e., resident, as also to determine the income which would fall under section 4(1) (a) or section 4(1) (c), as the case may be, it was necessary to determine the word income of the assessee. In determining this world income, a deduction on the ground of depreciation was taken into account and the depreciation which was so taken into account was the full depreciation. Similarly, for the purposes of determining the income of the assessee under section 4(1) (a) or 4(1) (c) read with section 42, by the applications of rule 33, the total world income of the assessee had to be calculated and in making these calculations, the entire amount of depreciation had to on the basis of proportion, by the application of rule 33, the income taxable under the Indian Income-tax Act was computation of the income that was taxed under the Indian Income-tax Act as the taxable income of the non-resident, no amount was actually allotted as by way of depreciation and, since in calculating the written down value of his assets under section 10(5) (b) only such amounts as have value been actually allowed by way of depreciation in the prior year could be deducted from the cost of the assets, there being no such amounts allowed to him, the written down value of the assets must be taken at cost of the assets. If this contention of the assessee was not upheld, his alternative contention was that in the computation of his income, which was made liable under the Indian Income-tax Act in the earlier years as a non-resident, only a part of the depreciation had entered and it was only such part that would be said to have been actually allowed to him under the Indian Income-tax Act, within the meaning of section 10(5) (b) of the said Act. The contention of the department, on the other hand, was as follows : The income of the assessee as a non-resident in the prior years had been computed on the basis of his world income. His world income as well as the total income liable to tax under the Income-tax Act had both been ascertained, in view of the provisions of the Indian-tax Act, it must be held that the full depreciation was actually allowed to the assessee under the provisions of the Act, within the meaning of section 10(5) (b). The Tribunal did not agree with the assessee's contention that the written down value of his assets was at cost. It, however, accepted the alternative contention which was put forward by the assessee, namely, that the written down value was cost minus such depreciation as had entered into the computation of the income of the assessee taxable under the Indian Income-tax Act. It negatived the department's contention that the written down value was the cost minus full depreciation which was taken into account in determining the total world income. It was out of this decision of the Tribunal that the first question was raised on this reference at the instance of the department.

3. In our opinion, the Tribunal is right in the view that it has taken. Section 10 of the Indian Income-tax Act provides for the computation of the profits or gains of business on which tax is to be paid under the Act. In the computation of these profits, certain deductions and allowances are allowed from the gross profits and one of such deductions is a deduction on account of depreciation of the business assets. The calculation of the amount which is permissible as deduction by way of depreciation in made on the written down value of the assets and, in fixing the written down value of the assets, the rule which is provided by section 10(5) (b) is that, where an assets has been acquired before the previous year, the written down value will be the actual cost to the assessee less all depreciation actually allowed to him under the Act in prior amount which has been deducted under section 10 in earlier years in the computation of the income of the assessee liable to tax under the Indian Income-tax Act. Now, in the earlier years in the present case, although no sum was specifically deducted from the income as by way of deduction by reason of the calculation made for the purposes of determining his taxable income. As we have already pointed out, his taxable income was determining his total world income. In the computation of the taxable income, therefore there had entered a corresponding fraction or percentage of the depreciation which was allowed in computing the world income. To the extent to which the depreciation had thus entered into the computation of the taxable income of the assessee, and to the extent to which he had thus obtained a deduction under section 10, it could be said that the said depreciation had been actually allowed to him under the provisions of section 10(5) (b). The Tribunal, therefore, in our opinion, was right in taking the view that it has taken. The contention of the department that, because the whole amount of depreciation was taken into account in calculating the world income, which was also a calculation under the Indian Income-tax Act the assessee must be taken to have been allowed the full depreciation under section 10(5) (b), is untenable. The full depreciation was no doubt taken into account in determining the world income. But the result of the taking into account of the full depreciation in the determination of the total world income has, as we have pointed out, resulted only in a fraction thereof entering into the computation of the income, liable to tax under the Income-tax Act, of the assessee during the previous years. It cannot, therefore, be said that the full amount of depreciation has been allowed to the assessee in prior years. The view that we are taking also receives support from a decision of the Madhya Pradesh High Court in Nandlal Bhandari Mills Ltd. v. Commissioner of Income-tax. One of the questions which was raised in that case on the reference under the Indian Income-tax Act was whether the depreciation deducted in arriving at the taxable income or in arriving at the world income, and the decisions was that it was depreciation which was deducted in arriving at the taxable income or in arriving at the world income that came within the expression 'actually allowed' under section 10(5) (b) of the Act. In the view that we are taking, our answer to the question is in the affirmative.

4. It was urged before the Tribunal by the department that although the Income-tax Officer had not considered the provisions of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, the said provisions were applicable in the present case, and certain amounts of depreciation which were required to be allowed under the Industrial Tax Rules, which had the force of law in the State of Indore, were required to be deducted in arriving at the written down value of the assets of the assessee. The Tribunal permitted this contention to be raised by the department. It was pointed out by the counsel appearing for the assessee that the contention could not be entertained unless it was found as a fact that the depreciation was actually allowed under the Industrial Tax Rules to the assessee, and unless it was also further held that the Industrial Tax Rules were rules which related to income-tax or super-tax, or any law relating to tax on profits of business. In view of this submission urged on behalf of the assessee, the Tribunal thought it fit to have the matter sent back to the Income-tax Officer, with a directions that he should ascertain whether any depreciation was allowed under the Industrial Tax Rules, and then consider the question as to whether the said rules related to income-tax or super-tax or any law relating to tax on profits of business, and if he found on those question in favour of the department, he should take into consideration such depreciation actually allowed under the said rules for the purposes of computing the written down value.

5. Now, the second question, which has been referred to us by the Tribunal is as follows : 'Whether the provisions of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, apply and were correctly applied to the facts of the case ?' Paragraph 2 of the said order is in the following terms :

'2. Computations of aggregate 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 and super-tax, or any laws relating to tax on profits of business, shall be taken into account in computing the aggregate depreciation allowances 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.'

6. The validity of this provision was at one time challenged. But that challenge has been set at rest by the decision of the Supreme Court in Commissioner of Income-tax v. Dewan Bahadur Ramgopal Mills Ltd. The validity of the provision which relates to income-tax or super-tax or any law relating to tax on profits of business within the meaning of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, i.e., on the basis that paragraph 2 of the said order has application to the case. We do not find anything in the Tribunal's order which indicates that any contention was raised before the Tribunal that paragraph 2 had no application to the case. What was contended was that the questions whether any depreciation was allowed under the Industrial Tax Rules, or if it was so allowed, whether such depreciation was under any law or rules relating to income-tax or super-tax, etc., not having been determined, the contention raised by the department on the basis of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, could not be entertained at that stage, and that contention has been accepted by the Tribunal. In these circumstances, our answer to question No. 2 as framed is that paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, is a valid provision of law, but it will have application to the present case only if the questions which the Tribunal has asked the Income-tax Officer to determine, are determined by the Income-tax Officer in favour of the department.

7. No order as to costs.

8. Order accordingly.


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