Case Note & Summary
The dispute arose from an income-tax reference concerning the computation of depreciation for the assessment year 1955-56. The respondent company, Dharampur Leather Cloth Co. Ltd., Bombay, was incorporated on 15 June 1943 as a private limited company and became a public limited company on 24 November 1949. Before incorporation, its promoters negotiated with the Ruler of the erstwhile Dharampur State and obtained total exemption from State income tax on profits for seven years from the commencement of working. The factory commenced working on 15 June 1949. On 1 August 1949, Dharampur State merged with the Province of Bombay. After this merger, the respondent applied to the Commissioner of Income-tax, Bombay, on 22 June 1951 for relief under paragraph 15 of the Merged States (Taxation Concessions) Order, 1949, which had been issued under Section 60A of the Indian Income-tax Act, 1922, and Section 23A of the Business Profits Tax Act, 1947. By letter dated 8 March 1952, the Commissioner communicated the Government's decision to exempt the company from income-tax and super-tax for five years from 1 April 1950. For the assessment year 1955-56, the first year after the exemption began, the assessee claimed depreciation on the original cost of its plant, machinery, and other assets, arguing that no depreciation had actually been allowed in earlier years. The Income Tax Officer rejected this claim and computed depreciation on written-down values that included notional depreciation for the exempt years. The Appellate Assistant Commissioner and the Appellate Tribunal upheld this approach, interpreting the words 'actually allowed' in Section 10(5)(b) widely enough to cover the assessee. On a reference, the Bombay High Court held that if no depreciation had been actually allowed in prior years, the original cost incurred for the machinery would be the written down value, and answered the referred question in the affirmative. The Revenue appealed by special leave to the Supreme Court. The Revenue contended that under Section 10(5)(b), depreciation must be deemed to have been allowed in the years when the income was exempted, and that the exemption given by the Commissioner under the letter of 8 March 1952 was a continuation of the agreement with the Ruler, thereby attracting the Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962. The assessee argued that no depreciation had actually been allowed and that the exemption was statutory under Section 60A, not contractual. The Supreme Court held that the words 'actually allowed' did not include any notional allowance, relying on its judgment in Commissioner of Income-tax, Madhya Pradesh v. M/s. Straw Products Limited, Bhopal. It further held that the exemption under paragraph 15 of the Merged States (Taxation Concessions) Order, 1949 was granted under Section 60A of the Income-tax Act and not under any agreement, so the 1962 Amendment Order had no bearing. Consequently, the case had to be determined with reference to Section 10(5)(b) unaffected by the amendment. The Supreme Court agreed with the High Court that depreciation was allowable on the original cost, dismissed the appeal, and awarded costs to the respondent.
Headnote
A) Income Tax - Depreciation - 'Actually allowed' under Section 10(5)(b), Indian Income-tax Act, 1922 - Notional depreciation not included - Where an assessee enjoyed tax exemption for prior years and no depreciation was actually allowed, the written down value is the original cost of assets - The Court followed Commissioner of Income-tax, Madhya Pradesh v. M/s. Straw Products Limited and held that the words 'actually allowed' do not include any notional allowance - Held that the High Court's affirmative answer was correct (Page 862 C). B) Taxation of Merged States - Exemption under Paragraph 15, Merged States (Taxation Concessions) Order, 1949 - Exemption under Section 60A, not an agreement - The 1962 Removal of Difficulties Amendment Order has no bearing because the exemption granted by the Central Government was under the Act, not under any agreement with the Ruler - Therefore the case fell to be determined with reference to Section 10(5)(b) unaffected by the 1962 Order - Held that the appeal failed and was dismissed with costs (Page 862 G).
Issue of Consideration
Whether depreciation is allowable on the original cost of plant and machinery and other assets acquired and used prior to 1-7-1953, where no depreciation had actually been allowed in earlier assessment years due to tax exemption; whether the words 'actually allowed' in Section 10(5)(b) include notional depreciation; whether the exemption granted under Paragraph 15 of the Merged States (Taxation Concessions) Order, 1949 was a continuation of an agreement with the Ruler so as to attract the 1962 Amendment Order
Final Decision
The Supreme Court held that the words 'actually allowed' in Section 10(5)(b) of the Indian Income-tax Act, 1922 did not include any notional allowance. The exemption granted under Paragraph 15 of the Merged States (Taxation Concessions) Order, 1949 was under Section 60A of the Act and not under any agreement with the Ruler. Therefore, the 1962 Amendment Order had no bearing. The High Court's affirmative answer was correct. The appeal failed and was dismissed with costs.
Law Points
- Legal points not extracted
- Actually allowed under Section 10(5)(b) Indian Income-tax Act
- 1922 excludes notional allowance
- written down value is original cost if no depreciation actually allowed in prior exempt years
- exemption under Paragraph 15 of Merged States (Taxation Concessions) Order
- 1949 is under Section 60A
- not an agreement
- Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order
- 1962 has no bearing
