Case Note & Summary
The respondent company, incorporated in 1939 in the erstwhile State of Bhopal, enjoyed a ten-year tax exemption under an agreement with the Ruler, which ended on October 31, 1948. After Bhopal merged with India in 1949, the company became assessable under the Indian Income Tax Act, 1922. For assessment years 1952-53 and 1953-54, the Income Tax Officer initially allowed depreciation on the original cost of assets. Later, relying on a Bombay High Court decision, the Officer initiated reassessment under Section 34(1) and recomputed depreciation by taking into account notional depreciation that would have been allowed under the Bhopal Income Tax Act had the company not been exempted. The Appellate Assistant Commissioner reversed this, holding that depreciation which had never actually been allowed could not be considered. The Income Tax Appellate Tribunal and the Madhya Pradesh High Court in reference upheld the Commissioner's view. While the matter was pending before the High Court, the Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962 added an Explanation to Paragraph 2 of the 1949 Order, deeming that 'actually allowed' meant the depreciation that would have been allowed but for the exemption. The Revenue appealed to the Supreme Court. The legal issues were the meaning of 'actually allowed', the effect and validity of the 1962 retrospective amendment, whether it could be considered by the Supreme Court, and whether it applied to the respondent as an assessee. The Court held that the original expression was unambiguous and meant actually given effect to, but the Explanation retrospectively changed its meaning. The Court allowed consideration of the subsequent amendment, rejected the ultra vires challenge, held the respondent was an assessee, and found the amendment retrospective from December 3, 1949. The appeals were allowed, the High Court judgment was set aside, and the question was answered in favour of the Revenue, accepting the Income Tax Officer's basis for computing written down value.
Headnote
A) Income Tax - Depreciation Allowance - Meaning of 'Actually Allowed' - Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949 Paragraph 2 - The expression 'actually allowed' in the original 1949 Order unambiguously connoted that the allowance was actually given effect to, not merely allowable; the High Court was correct that depreciation never actually allowed could not be taken into account under the original order. Held that the original order did not permit notional depreciation during the exemption period (Paras 1-5). B) Income Tax - Retrospective Amendment - Effect of Explanation - Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962 - The Explanation added to Paragraph 2 retrospectively changed the meaning of 'actually allowed' to include depreciation that would have been allowed but for exemption; the Revenue was entitled to rely on the 1962 Order, making the Income Tax Officer's basis the correct one for computing written down value. Held that the 1962 Order deemed the notional depreciation as actually allowed from December 3, 1949 (Paras 6-10). C) Appellate Jurisdiction - Consideration of Subsequent Legislation - Scope of Reference - Indian Income Tax Act, 1922 Section 66(1) - The Supreme Court could take into account the 1962 Amendment Order even though it was not in existence when the High Court answered the reference; the question referred was of sufficient amplitude to include a discussion of retrospective amendments. Held that Commissioner of Sales-tax, U.P. v. Bijli Cotton Mills Hathras applied (Paras 11-12). D) Constitutional Law - Validity of Subordinate Legislation - Ultra Vires Challenge - Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962 - The respondent could not raise the ultra vires challenge to the 1962 Order because of the decision in K.S. Venkataraman v. State of Madras. Held that the challenge was barred by precedent (Paras 13-14). E) Income Tax - Definition of Assessee - Applicability to Exempted Entity - Bhopal Income Tax Act - The respondent could not claim the 1962 Order did not apply on the ground that no income-tax was payable and it was not an assessee; 'assessee' meant a person by whom income-tax was payable under the Bhopal Act, and but for the agreement with the Ruler the respondent would have been liable to pay tax. Held that the respondent fell within the definition of assessee (Paras 15-16). F) Income Tax - Retrospectivity of Amendment - Applicability to Prior Assessments - Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962 - The 1962 Order was retrospective and applied to assessments made before it came into force because it deemed the explanation as in force from December 3, 1949, when the original 1949 Order came into force; it applied to assessment years 1952-53 and 1953-54. Held that the notional depreciation was correctly taken into account (Paras 17-18).
Issue of Consideration
Whether the correct basis for computing written down value of depreciable assets was the one adopted by the Income Tax Officer or the Appellate Assistant Commissioner, considering paragraph 2 of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, clause 8 of the 1938 Agreement, and the retrospective Explanation added by the 1962 Amendment Order
Final Decision
The appeals were allowed, the judgment of the High Court was set aside, and the question referred was answered in favour of the Revenue. The correct basis for computing the written down value of depreciable assets was the one adopted by the Income Tax Officer. The respondent was ordered to pay costs.
Law Points
- Legal points not extracted
- Expression 'actually allowed' under Taxation Laws (Merged States) (Removal of Difficulties) Order
- 1949 means depreciation actually given effect to
- 1962 Amendment Order retrospectively changed meaning to include notional depreciation during exemption
- subsequent retrospective amendment can be considered by appellate court if reference question has sufficient amplitude
- assessee includes person who would have been liable but for exemption
- retrospective amendment applies from original order's commencement date
