1. The petitioner-company was incorporated in Pondi-cherry in February, 1951, under the French laws that applied to the French Settlements in India at that time. It was subjected to income-tax under the Decret of 9th May, 1949, approving two deliberations of the representative assemply of the French Settlements in India. Under article 6 of the Decret, the profit taxable in the case of a company was the net profit arrived at after deducting expenditure incurred and depreciation written off.
2. In accordance with the agreement between the Government of India and the Government of France, the administration of the French establishments in India was taken over by the Government of India from 1st November, 1954. Article 14 of that Agreement says:
'In respect of taxes and duties other than customs duties and excises, nationals of France and the French Union belonging by birth to the establishments or domiciled therein on the date of the 'de facto' transfer be subjected in regard to their persons, properties and enterprises to the same laws and regulations as are at present in force.'
3. Pondicherry became a Union Territory with effect from the 16th August, 1962, by the addition of the ninth item to Part II of the First Schedule to the Constitution by the Constitution (Fourteenth Amendment) Act, 1962. Thereafter, the Pondicherry (Administration) Act; 1962, was enacted providing for the continuance in force of all laws in force immediately before the 16th August, 1962, in the former French establishments in Pondicherry until amended or repealed. All taxes, duties and fees which immediately before the 16th August, 1962, were being lawfully levied were continued to be levied and applied to the same purposes until other provision is made. The Act also gave power to the Central Government to extend to Pondicherry any enactment which is in force in a State with such restrictions and modifications as they may think fit.
4. On 30th March, 1963, the President promulgated the Taxation Laws (Extension to Union Territories) Regulation, 1963, in exercise .of the powers conferred by Article 240 of the Constitution. The Regulation extended to the Union Territories certain taxation laws with amendments. One of the laws so extended was the Income-tax Act of 1961, hereinafter called the Act. Clause 7 of the said Regulation conferred power on the Central Government to remove any difficulty arising in giving effect to the provisions of any Act extended by the Regulation in any Union Territory. So far as the Income-tax Act, 1961, was concerned, the Regulation inserted a new provision, Section 294A, giving power to the Central Government to remove any difficulty, hardship or anomaly arising as a result of the application of that Act to the Union Territories.
5. For the assessment years 1964-65 and 1965-66, the company claimed depreciation on its buildings, plant and machinery in accordance with the definition of 'written down value' occurring in Section 43(6) of the Act. The Income-tax Officer, Pondicherry, however, negatived the said claim holding that the depreciation written off in the books of the company prior to the extension of the Act to the Union territories should be deducted in arriving at the written down value. Aggrieved against the said rejection, the company filed appeals before the Appellate Assistant Commissioner and they are still pending.
6. The company filed its return of income for the assessment year 1966-67, on the 3rd January, 1967, claiming depreciation on the same basis as was done in the earlier two years. The Income-tax Officer, relying on the provisions of 'Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order No. 2 of 1970' which had been, in the meanwhile, issued under Clause 7 of the Taxation Laws (Extension to Union Territories) Regulation, 1963, deducted from the written down value, as given by the company, all depreciation written off from the books of the company prior to the extension of the Act and completed the assessmenton that basis on 16th March, 1971. The company has filed an appeal against the said order and the same is pending.
7. In this writ petition, the petitioner challenges the constitutional validity of the said 'Taxation Laws (Extention to Union Territories) (Removal of Difficulties) Order No. 2 of 1970', hereinafter referred to as 'the impugned order', as he cannot challenge the vires of the same in the appeals pending before the appellate authority. The challenge to the said impugned order has been made on the following grounds :
(1) There could be no difficulty in the application of the Act to the Pondicherry State for the removal of which the impugned order is said to have been passed and as the power conferred by Clause 7 of the Regulation for removal of difficulties cannot be exercised when there is no difficulty at all, the impugned order has no validity.
(2) Even assuming that a difficulty arose in the application of the Act to the Pondicherry State, the impugned order passed by the Government of India under Clause 7 of the Regulation virtually amending Section 294A which has been introduced by the Regulation promulgated by the President under Article 240 of the Constitution, in so far as it is inconsistent with the said Section is invalid.
(3) Even if the impugned order is taken to be validly passed notwithstanding its inconsistency with the provisions of Section 294A, it is discriminatory in character as the incidence of income-tax based on an allowance made by the French Government under its laws results in inequality amongst the assessees similarly situate and holding same kind of property and, therefore, the order is violative of Article 14 of the Constitution.
(4) In the guise of removing a difficulty the impugned order imposes a disability on the assessees in the Pondicherry State which was neither contemplated by the provisions nor consistent with the scheme and purpose of the Act as extended to that territory.
(5) In any event, retrospective effect given to the impugned order is without the authority of law.
8. The petition is resisted by the Income-tax Officer, Pondicherry, and the Union of India. In the counter-affidavit filed on behalf of the Union of India, the circumstances attendant upon the issue of the impugned order have been set out, and the contention of the petitioner that in fact no difficulty could ever arise in applying the provisions of the Act relating to the written down value of the assets has been disputed. It is said that while applying the provisions of the Regulation of 1963 to the Union Territories of Pondicherry, Goa, etc., the income-tax authorities were faced with a real difficulty in that in spite of the fact that the assets of the assessees in Pondicherry were old, they had to allow depreciation on the full originalcosts on account of the definition of 'written down value' in Section 43(6) of the Act and the written down value of their assets as per the definition had no relation whatsoever with the realities. While giving effect to the provisions of the Regulation, the income-tax authorities arc said to have realised that there was a lacuna in the Act as applied by the said Regulation to the Union Territory df Pondicherry, that the asscssees residing therein were getting unintended benefit, and as such there was a necessity for a suitable amendment being made in the existing law. Referring to the petitioner's assessments for 1964-65 and 1965-66, it has been pointed out that the petitioner had at first filed returns of income working out the depreciation allowance not on the basis of the original cost of the assets, but on the basis of the figures in the petitioner's balance-sheet in which the original cost has been reduced successively by charging depreciation year after year, and that it was only in its revised returns a plea was raised, that the depreciation had to be worked out on the basis of the original cost.
9. According to the respondents, it is the Central Government who are to decide the question whether any difficulties have arisen in giving effect to the Acts extended to the Union Territories under Clause 7 of the Regulation and as such the determination of the Central Government in this regard as is set out in the preamble to the impugned order is final and cannot be questioned in any court of law. Dealing with the petitioner's contention that the impugned order is discriminatory and as such violates Article 14 of the Constitution, the respondents state that on the contrary it is only if the impugned order is not brought into force there will be hostile discrimination against the residents of other parts of India, in that the assessees of the erstwhile territory of Pondicherry will be given a benefit which is not at all envisaged or given under the provisions of the Act to other assessees. Though it is true that as per the impugned order the written down value of the assets used by the petitioner for the purpose of its business is likely to be reduced with the further consequences of non-allowance of depreciation on the entire valuation of the assets, and of enhanced tax liability, the petitioners cannot reasonably complain against such increased liability as the impugned order had been made with a view to apply the income-tax laws uniformly throughout India and to prevent undue benefit being given to the assessees of the Union Territories to which the income-tax law is extended for the first time. Thus, it is the case of the respondents that the provisions of Sections 52(1) and 43(6) of the Act could not effectively be implemented without unduly benefiting the assessees in the Union Territory of Pondicherry, that in the absence of a provision for inclusion of depreciation allowance given under a foreign law relating to income-tax in the written down value of the assets in the saidsections, their application to the Union Territory of Pondicherry was totally divorced from reality, that the Income-tax Officer, while applying the provisions of the Regulation to a Union Territory, realised that the application of the said Regulation is in fact wholly divorced from the reality resulting in hostile discrimination against other assessees in the rest of India, that it cannot be said that no difficulty was experienced in the application of the Regulation, and that the impugned order is intended to place the assessees in Pondicherry on a position similar to the assessees elsewhere in India in similar circumstances and in a position of equality and equal treatment which is part of the basic purpose and scheme of the Indian Income-tax Act.
10. As regards the petitioner's contention that the impugned order is invalid as it virtually amends Section 294A of the Act inserted by the Presidential Regulation promulgated under Article 240 pf the Constitution, the case of the respondents is this: Income-tax Act of 1961 has no doubt been extended to the Pondicherry State by the President's Regulation, 1963. Even so, the difficulties sought to be removed by the impugned order are none the less difficulties in the application of the provisions of the Act to Pondicherry. Though Section 294A enables the Central Government to remove all manner of difficulties, hardships and anomalies arising as a result of the application of the Act to Pondicherry and other Union Territories, Clause 7 of the Regulation can also be invoked to overcome any difficulty that is felt by the Income-tax Officers in enforcing the provisions of the Act in Pondicherry, etc., and that the impugned order is not ultra vires of Clause 7 of the Regulation as alleged by the petitioner. There is no conflict between Section 294A of the Income-tax Act, 1961, and Clause 7 of the Regulation.
11. In the light of the above rival contentions we have to consider the validity of the provisions of the impugned order. The impugned order is dated 18th November, 1970, and Clause 2 of that order, so far as it is relevant here, is as follows :
'2. Computation of aggregate depreciations allowable and written downvalue.--In making any assessment under the Income-tax Act, 1961 (43 of1961), all depreciation actually allowed under the local laws shall be takeninto account in computing the aggregate of all deductions in respect ofdepreciation referred to in Clause (i) of Sub-section (2) of Section 34 and thewritten down value under Sub-cluase (2) of Clause (6) of Section 33 in thesaid Act:.....
Explanation.--For the purpose of this paragraph, 'local laws' means-
(i) in relation to the Union Territory of Dadra and Nagar Haveli,any law relating to income-tax or super-tax other than the Income-taxAct, 1961, in force in that territory immediately before the 1st day of April, 1963; and
(ii) in relation to the Union Territories of Goa, Daman and Diu and Pondicherry, any law relating to income-tax or super-tax in force in the Union Territory concerned immediately before the 1st day of April, 1963.'
12. The said order came into force with effect from the 1st day of April, 1963, the date when the Presidential Regulation actually took effect.
13. Section 32(1) of the Income-tax Act, 1961, says that in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the,purposes of the business or profession, such percentage on the written down value thereof as may in any case or class of cases be allowed as and by way of deduction subject to the provisions of Section 34. Section 34(2)(i) of the the Act provides that the aggregate of all deductions in respect of depreciation made, under Sub-section (1) of Section 32 shall in no case exceed the actual cost to the assessee of the buildings, machinery, plant or furniture as the case may be. Section 43(6) defines as to what is 'written down value' referred to in Section 32(1). It says that in the case of assets acquired in the previous year, the written down value is the actual cost to the assessee and that 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 statutory provisions or under any other earlier Act or executive orders shall be the written down value. As per the above statutory provisions the depreciation to which the petitioner will be entitled in the first year 1964-65 after the Income-tax Act was extended to the Union Territory of Pondicherry will be the actual cost of its machinery, plant, etc., as no depreciation has actually been allowed to him under the Act or under the earlier Acts as contemplated in Section 43(6)(b). Even though the assessee got depreciation allowance in relation to the said assets in the earlier years under the French law that could not be taken into account in finding out the written down value as defined in Section 43(6) for working out the depreciation to which they will be entitled under Section 32(1). But, as the Government of India was of the view that it was unreal to value the assets which are old, worn out and depreciated in value at their original cost and to allow depreciation on that basis, it was felt necessary to make a provision that the depreciation allowed earlier under the French law should be taken into account and the original cost reduced to that extent while determining the depreciation allowance to which assessees in Pondicherry, etc., will be entitled under Section 32(1). According to them, by applying Section 43(6) as it is without such a provision to the assessees at Pondicherry, etc., they would get depreciation allowance on the basis of the original cost of their used assets,while the assessees in the rest of India got such allowance on the depreciated value of the original cost of their assets. To obviate this inequality and to ensure uniformity in the grant of depreciation allowance between the assessees in Pondicherry, etc., and the assessees in the rest of India, the impugned order is said to have been passed by the Union of India, in exercise of their powers under Clause 7 of the Presidential Regulation of 1963.
14. As we are of the view that the petitioner has to succeed in his first and fourth contentions in view of the recent decision of the Supreme Court in Madeva Upendra Sinai v. Union of India, : 98ITR209(SC) (W.P. No. 112 of 1971) it is not necessary to consider the tenability or otherwise of the other contentions. The learned counsel for the assessee points out that the difficulty in the application of the definition of 'written down value' is inherent in the scheme and the structure of the Act itself that even in respect of an assessee who is a resident in one year and non-resident in another year, depreciation allowed on his assets situate in another country is not taken into account, and he is allowed depreciation on the written down value of the assets without any deduction for depreciation made under the laws of the country in which the property is situate. The learned counsel also points out that in the case of an assessee whose total income was less than the exempted limit prescribed under the Income-tax Act in the earlier years, but who had taxable income in the subsequent year, he is granted a depreciation allowance on the original cost of the machinery as he has not obtained any allowance for depreciation in the earlier years. Thus, according to the learned counsel, even before the application of the Act to the Pondicherry territory, the allowance was granted under Section 32(1) on an unreal basis and that unreality in the grant of allowance pointed out by the respondents has not arisen peculiarly by the application of the Act to the Pondicherry territory. If at all, such a difficulty has been there in the working of the Act even before it was applied to the Pondicherry territory and the said difficulty did not arise on the application of the Act to the Pondicherry territory. It is further pointed out by the learned counsel that the President when he promulgated the Regulation should be presumed to have been aware of the difficulty in view of the fact that the same difficulty had been felt on two earlier occasions when the Act was made applicable to the merged. States in 1949 and to Part B States in 1950, that no provision having been made in this regard in the Presidential Regulation, it should be presumed that the written down value as defined under Section 43(6) of the Income-tax Act is intended to be applied as it is.
15. When the Income-tax Act was extended to the merged States in pursuance of the Taxation Laws (Extension to Merged States) Ordinance,1949, difficulties arose in the computation of aggregate depreciation allowance and the written down value, and to overcome those difficulties, the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, was passed on December 3, 1949, in exercise of the power contained in Section 6 of the said Ordinance of 1949. Clause 2 of that Order is practically the same as Clause 2 of the impugned order. The said clause provided that in making any assessment under the Indian Income-tax Act, 1922, all depreciation actually allowed under any laws or rules of a merged State relating to income-tax and sup3r-tax, shall be taken into account in computing the aggregate depreciation allowance and written down value. This Clause 2 was later amended by the Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, 1962, by adding the following Explanation :
'Explanation.--For the purpose of this paragraph, the expression 'all depreciation actually allowed under any laws or rules of a merged State' means and shall be deemed always to have meant:
(a) the aggregate allowance for depreciation taken into account in computing the written down value under any laws or rules in force in a merged State or carried forward under the said laws or Sub-clauses, and
(b) in cases where income had been exempted from tax under any laws or rules in force in a merged State or under any agreement with a Ruler, the depreciation that would have been allowed had the income not been so exempted.'
16. Likewise, when the Income-tax Act was applied to Part B States,difficulties were felt in the computation of the aggregate depreciationallowance and the written down value and the Taxation Laws (Part BStates) (Removal of Difficulties) Order, 1950, came to be passed on Decem- ber 2, 1950. Clause 2 of that Order, which is similar to Clause 2 of theimpugned order, says that in making any assessment under the IndianIncome-tax Act, 1922, all depreciation actually allowed by laws of Part BStates relating to income-tax, etc., shall be taken into account in computingthe aggregate depreciation allowance and the written down value.
17. The validity of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, came up for consideration before the Supreme Court in Straw Products Ltd. v. Income-tax Officer, : 68ITR227(SC) . It was contended for the assessee that the existence of a difficulty is a condition precedent to the exercise of the power contained in Section 6 and the Amendment Order, 1962, which seeks to remove a difficulty which has not arisen is, therefore, unauthorised. The Supreme Court held that in the application of the Indian Income-tax Act to the merged States an initial difficulty arose in the matter of determining the depreciation allowance and the writtendown value, that the said difficulty having been removed by the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, there survived no difficulty in giving effect to the provisions of the Indian Income-tax Act, or the rules or orders extended by Section 3 of Act 67 of 1949 to the merged States and that the Amendment Order, 1962, seeks to alter the connotation of the expression 'depreciation actually allowed', while no difficulty arose or could arise in giving effect to the provisions relating to the allowance of depreciation under the Income-tax Act in the merged States after the earlier Order of 1949, It also held in that case that the existence of any 'difficulty' does not depend on the subjective satisfaction of the Central Government and as it is a condition precedent for the exercise of the power, existence of the condition, if challenged, must be established as an objective fact.
18. In Commissioner of Income-tax v. Dewan Bahadur Ramgopal Mills Ltd., : 41ITR280(SC) the Supreme Court dealt with the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, issued in exercise of the power in section 12 of the Finance Act of 1950. Before the Supreme Court it was contended that the Removal of Difficulties Order, 1950, is ultra.vires the powers conferred on the Central Government under Section 12, as (1) no difficulty actually arose in giving effect to the provisions of any of the Acts, rules or the orders to any of the States and the condition for the exercise of the power is not fulfilled, and (2) that it offends Article 14 of the Constitution. The Supreme Court, dealing with the first of these contentions, expressed the view thus:
'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 Act not having been repealed by the Income-tax 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 case, namely, depreciation allowance to be allowed to the assessee in the accounting year uuder the Indian Income-tax 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. Itwas, therefore, necessary to explain paragraph 2 of the Removal of Difficulties Order, 1950, to assimilate or harmonise the position regarding depreciation allowance, and the Explanation added in 1953 or 1956 was obviously intended to remove the difficulty arising out of that disparity or disharmony.'
19. Dealing with the second contention, it said :
'Learned counsel for the respondent has asked us to consider the cases of assessees in three different areas which subsequently come in a Part B State: in one area there was no law relating to income-tax; in the second, there was a law relating to income-tax under which written down value was computed on the basis of depreciation actually allowed year after year, while in the third, the written down value was computed in the manner provided under the Hyderabad Income-tax Act; it is pointed out that on the extension of the Indian Income-tax Act (read with paragraph 2 of the Removal of Difficulties Order, 1950, and the Expla-nation) to those areas, the assessee in the first area will get depreciation allowance on the actual cost ; in the second area he will get such allowance on the basis of actual cost less depreciation actually allowed; and in the third area he will get such allowance on the actual cost less depreciation taken into account. It is contended that this resultant discrimination is arbitrary and without any rational justification. We think that learned counsel for the respondent has ignored one essential consideration which clearly vitiates his argument. In the matter of depreciation allowance, the assessees in the three areas in the example given by him do not stand on the same footing ; they are not situated alike so as to be entitled to be treated alike. It is obvious that an assessee from an area where there was no income-tax law at all can never say that in the matter of depreciation allowance as respects buildings, machinery, plant, etc., he is on a par with a person in an area where there was a law relating to income-tax allowing depreciation on such buildings, machinery, plant, etc. The same would be the position with regard to areas where the previous law as to depreciation was different. Indeed, to treat all these persons alike would be tantamount to unequal treatment. In our view, the notification of 1956 creates no unequal treatment of persons in a like situation ; it applies to all who are in a like situation, namely, all those to whom paragraph 2 of the Removal of Difficulties Order, 1950, applies. We consider that the challenge to the notification based on Article 14 is wholly unsubstantial.'
20. The scope of the above decisions was considered by the Supreme Court in a recent decision in Writ Petitions Nos. 112, etc., of 1971 (Madeva Upendra Sinai v. Union of India). In that case, the validity of the same Removal of Difficulties Order 2 of 1970 was challenged on the groundthat the difficulty pointed out above will not come under Clause 7 of the Regulation and the Central Government in exercise of its power under that clause is not competent to supply a deficiency of such a nature. It was urged by the revenue that unless such a deficiency or omission was supplied, it would be difficult to collect tax and allow depreciation to assessees in the extended territories to the same extent or at the same rate at which it has been collected from or allowed to assessees who have throughout been assessed under the Indian Income-tax Act, 1922. While rejecting the said contention of the revenue the Supreme Court said :
'Now let us turn to Clause (7) of the Regulation. It will be seen that the power given by it is not uncontrolled or unfettered. It is strictly circumscribed, and its use is conditioned and restricted. The existence or arising of a difficulty is the sine qua non for the exercise of the power. If this condition precedent is not satisfied as an objective fact, the power under this clause cannot be invoked at all. Again, the 'difficulty' contemplated by the clause must be a difficulty arising in giving effect to the provisions of the Act and not a difficulty arising aliunde, or an extraneous difficulty. Further, the Central Government can exercise the power under the clause only to the extent it is necessary for applying or giving effect to the Act, etc., and no further. It may slightly tinker with the Act to round off angularities, and smoothen the joints or remove minor obscurities, to make it workable, but it cannot change, disfigure or do violence to the basic structure and primary features of the Act. In no case, can it, under the guise of removing a difficulty, change the scheme and essential provisions of the Act.'
21. In view of the said decision of the Supreme Court, the petitioner's contentions 1 and 4 that there is in fact no difficulty in giving effect to the provisions of the Income-tax Act and that in the guise of removing a difficulty the Central Government cannot change the scheme and the essential provisions of the Act have to be accepted and the impugned assessment order set aside with a direction to make a fresh assessment without taking into account the said Removal of Difficulties Order, 2 of 1970.
22. As the petitioner succeeds on the first and fourth contentions, we think it unnecessary to go into the other contentions raised by the petitioner. The writ petition is allowed accordingly. No costs.