Case Note & Summary
The case arose from the extension of the Indian Income Tax Act, 1961 to the Union Territory of Goa, Daman and Diu after these erstwhile Portuguese territories became part of India on December 19, 1961. The President of India, under Article 240, promulgated the Taxation Laws (Extension to Union Territories) Regulation, 1963, which extended the Income Tax Act, 1961 to the Union Territory and repealed the corresponding local law from April 1, 1963. Clause 7 of the Regulation empowered the Central Government to issue orders to remove difficulties in giving effect to the extended Acts. The petitioners were businesses operating in the Union Territory. Under the previous Portuguese law, tax was levied on gross income or turnover without computing net profits and without allowing depreciation. After the extension of the Indian Act, assessments were made from assessment year 1964-65 onwards, and depreciation was allowed on the written down value computed under section 43(6)(b) of the Income Tax Act, 1961. Since no depreciation had been actually allowed under the Portuguese law, the written down value for the first year was taken as actual cost, and thereafter reduced by depreciation actually allowed. On November 8, 1970, the Central Government issued the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order, 1970. Proviso 2 to clause 3 of that Order provided that where no depreciation was actually allowed under local law, depreciation for that period should be calculated at the rates under the Indian Income Tax Act and deemed to be depreciation actually allowed. This would have significantly reduced the written down value of assets, increasing tax liability retrospectively from assessment year 1964-65. The petitioners challenged the validity of proviso 2 as ultra vires clause 7 of the 1963 Regulation. The Supreme Court allowed the petitions. It held that the removal of difficulties power is limited to making minor adaptations and peripheral adjustments to make the statute workable; it cannot change the basic structure or essential provisions of the Act. The existence of a difficulty arising in giving effect to the Act is a precondition, and no such difficulty existed here because sections 32 and 43(6)(b) of the Income Tax Act could be applied without any problem. The phrase 'actually allowed' in section 43(6) means depreciation actually taken into account or granted, not notionally allowed. Under the Portuguese law, no depreciation was computed or allowed, so the proviso's fiction of deemed depreciation was invalid and altered the fundamental scheme of the Income Tax Act. The court also rejected the argument that the proviso ensured equality, holding that it placed Union Territory assessees in a worse position. The court declared the second proviso to clause 3 of the 1970 Order ultra vires and held that the Revenue could not levy tax on the basis of depreciation allowance computed in accordance with that proviso. The decisions in Straw Products Ltd. v. Income-tax Officer, Bhopal and Commissioner of Income-tax, Hyderabad v. Dewan Bahadur Ram Gopal Mills Ltd. were considered and distinguished.
Headnote
A) Interpretation of Statutes - Removal of Difficulties Clause - Scope of Executive Power - Taxation Laws (Extension to Union Territories) Regulation, 1963, Clause 7 - The Central Government's power under clause 7 to remove difficulties is ancillary and limited to making minor adaptations and peripheral adjustments without altering the basic structure or essential features of the extended Income Tax Act. The existence of a difficulty arising in giving effect to the Act is a precondition, not a difficulty aliunde. In this case, computing depreciation under sections 32 and 43(6)(b) of the Income Tax Act, 1961 presented no difficulty because no depreciation had actually been allowed under the Portuguese law, so written down value equalled actual cost. Held that the impugned proviso, by deeming depreciation to have been allowed where none was allowed, changed the fundamental scheme of the Act and was ultra vires the removal of difficulties power. (Paras 1-26) B) Income Tax - Depreciation - Written Down Value - Income Tax Act, 1961, Sections 32, 43(6)(b) - Section 43(6)(b) defines written down value as actual cost less all depreciation actually allowed under the 1961 Act, 1922 Act, or any Act repealed thereby or executive orders. If no depreciation was actually allowed in previous years, the written down value for the first assessment year under the 1961 Act is the actual cost. The court found that this method was applied for assessment years 1964-65 onwards without difficulty. Held that the impugned proviso's attempt to substitute depreciation deemed to have been allowed for depreciation actually allowed altered the statutory scheme and exceeded the power under clause 7 of the Regulation. (Paras 1-26) C) Income Tax - Depreciation - Meaning of 'Actually Allowed' - Income Tax Act, 1961, Sections 32, 43(6) - The phrase 'actually allowed' in section 43(6) means depreciation actually taken into account, granted, or given effect to, not depreciation notionally allowed. Under the erstwhile Portuguese law, no depreciation was computed or allowed on the basis of profits; the tax was a turnover tax on gross income. Held that the impugned proviso's creation of a legal fiction deeming depreciation to have been allowed even where none was actually allowed was invalid and contrary to the plain language of the Act. (Paras 1-26) D) Constitutional Law - Legislative Delegation - Limits on Removal of Difficulties Orders - Taxation Laws (Extension to Union Territories) Regulation, 1963, Clause 7 - A removal of difficulties order cannot travel beyond the purpose of making the extended Act workable; it cannot impose a higher tax liability by retrospectively altering the basis of depreciation computation. The court held that the impugned proviso did not remove a difficulty but created a new basis for depreciation not contemplated by the Income Tax Act, thereby disfiguring the Act's primary features. Held that the second proviso to clause 3 of the 1970 Order was ultra vires the Central Government. (Paras 1-26) E) Taxation - Equality - Discrimination Against Union Territory Assessees - Income Tax Act, 1961, Sections 32, 43(6) - The Revenue argued that the impugned proviso brought equality among assessees in India, but the court rejected this, holding that far from ensuring parity, it placed assessees in the Union Territory in a worse position than assessees elsewhere because they would get lower depreciation allowances despite no depreciation having been allowed earlier. Held that the equality argument failed. (Paras 1-26)
Issue of Consideration
Whether proviso 2 to clause 3 of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order, 1970 is ultra vires clause 7 of the Taxation Laws (Extension to Union Territories) Regulation, 1963, and whether the Central Government could deem depreciation to have been allowed under local law where no depreciation was actually allowed.
Final Decision
The Supreme Court allowed the petitions and held that the second proviso to clause 3 of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order, 1970 is ultra vires the Central Government when exercising its powers under clause 7 of Regulation III of 1963. The Revenue is not entitled to levy tax on the basis of depreciation allowance computed in accordance with the said proviso.
Law Points
- Removal of difficulties power is limited to minor adaptations and peripheral adjustments
- existence of difficulty is sine qua non
- difficulty must arise in giving effect to the Act
- Central Government cannot change basic structure or essential provisions
- phrase 'actually allowed' means depreciation actually taken into account or granted
- not notionally allowed
- written down value under section 43(6)(b) of Income Tax Act
- 1961 is actual cost less depreciation actually allowed
- impugned proviso deeming depreciation allowed where none was allowed is ultra vires clause 7 of Regulation.
