# COMMISSIONER OF INCOME-TAX, MADHYA PRADESH v. M/S. NANDLAL BHANDARI MILLS LTD

- **Citation:** [1966] 2 S.C.R. 925
- **Court:** Supreme Court of India
- **Decided:** 1965-12-07
- **Case number:** Civil Appeals Nos. 629 to 632 of 1964
- **Bench:** K. SUBBA RAo, J. C. Shah, S. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-madhya-pradesh-v-m-s-nandlal-bhandari-mills-ltd-3767
- **Pages:** 19

## Headnote

Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950,
Para 2, proviso-Depreciation allowed to non .. resident company in Part
B States as well as in India-Fraction of total world income taken as
Indian income-Depreciation allowed against total world income whether
depreciation 'actually allowed' against Indian
income-Computation of
written down value after 1950.
In the years prior to 1950 the respondent company with headquarters
in the erstwhile state of Indore was assessed to tax under the Indore Industrial Rules, 1927 and also under the Indian Income-tax Act, 1922 in
so far as its income fell with:n ss. 4(1)(a) and 4(1)(c) read withs. 42
of the Act.
Depreciation had been allowed to it under the Indore Industrial Rules as we!! as the Indian Act.
The written down value of its
assets for the purpose of 1950-51 and subsequent assessments had to be
determined under the Taxation Laws (Part B States) (Removal of DUii.
culties) Order, 1950 wh'ch laid down in the proviso to paragraph 2 that
'where in respect of any a'8et, depreciation
has been allowed for
any
year, both in the assessment made in the Part B State and in the taxable
territories, the greater of the two sums allowed shall only be taken into
account."
The Income-tax Officer found that up to and including the
year 1944 the sum allowed as depreciafon under the Indian Income-tax
Act was larger and therefo-e in
computing
written down value as on
1-1-49 he took the sum allowed as depreciation
under the Indian Act
up to the end of 1944 and under the Indore Industrial Rules after that
date. In the assessments made for the per:od up to the end of 1944 the
respondent company had been treated as a non-resident and its taxable
income under the Indian Income-tax Act had been
worked out under
Rule 33 of the Indian Income-tax Act,
1922 as a fraction of its total
world income.
In determining the total world income the depreciation
claimable under the Indian Act had been allowed,
and it was tbe full
amount of this depreciation allowed against the total world income that
the Income-tax Officer took into account in determining the written down
value of the respondent company's assets for the purpose of the 1950.51
assesiment. The respondent company claimed that as only a fraction of
the total world income had been treated as
taxable income,
therefore
only a fraction of the depreciation allowed
against the world income
should be taken as having been 'actually allowed' in the terms of paragraph 2 of the Removal of fffficulties Order. The Income-tax Officer,
the Appellate Assistant Commissioner and the Appellate Tribunal having
rejected this plea the m1tter went in reference to the High Court. That
Court took the view contended for by the respondent viz. that only the
proportionate amount of deoreciation which was attributable to the taxw
able income could be taken °into account. The Revenue appealed to this
Court.
It was urged on behalf of the appellant that depreciation was allowed
in respect of the use of the assets in the busine5', that the allowance did
not depend on the as;e5'able income, and that the High Court therefore
went wrong in striking a proportion on tbe basis of a part of the income
926
SUPREME COURT
REPORTS
(1966] 2 S.C.R.
actually assessed under the Indian Income-tax Act. The different expressions used in various parts of paragraph 2 of the Removal of Difficulties
Order came for consideration.
H:ELD: Per Subba Rao and Sikri, JJ.-(i) The word "assessment"
used in the proviso to paragraph 2 has been given a very wide meaning
in decided cases. It means sometimes
'the
computation
of
income'.
sometimes the determination of the amount of tax payable; and sometime< the procedure laid down in the Act for imposing liability upon the
tax-payer. The proviso used ihe word 'assessment' both with reference
to Part B States and also with reference to the taxable territories.
But
in the present case the different shades of meaning of the said word were
not relevant.
For the

## Text

_Characters 0–39,715 of 49,527. This is a partial read: ask again with offset=39715 for what follows._

A
B
c
D
'
•
G
H
COMMISSIONER OF INCOME-TAX, MADHYA
PRADESH
v.
M/S. NANDLAL BHANDARI MILLS LTD.
December 7, 1965
[K. SUBBA RAo, J. C. SHAH AND S. M. SIKRI, JJ.]
Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950,
Para 2, proviso-Depreciation allowed to non .. resident company in Part
B States as well as in India-Fraction of total world income taken as
Indian income-Depreciation allowed against total world income whether
depreciation 'actually allowed' against Indian
income-Computation of
written down value after 1950.
In the years prior to 1950 the respondent company with headquarters
in the erstwhile state of Indore was assessed to tax under the Indore Industrial Rules, 1927 and also under the Indian Income-tax Act, 1922 in
so far as its income fell with:n ss. 4(1)(a) and 4(1)(c) read withs. 42
of the Act.
Depreciation had been allowed to it under the Indore Industrial Rules as we!! as the Indian Act.
The written down value of its
assets for the purpose of 1950-51 and subsequent assessments had to be
determined under the Taxation Laws (Part B States) (Removal of DUii.
culties) Order, 1950 wh'ch laid down in the proviso to paragraph 2 that
'where in respect of any a'8et, depreciation
has been allowed for
any
year, both in the assessment made in the Part B State and in the taxable
territories, the greater of the two sums allowed shall only be taken into
account."
The Income-tax Officer found that up to and including the
year 1944 the sum allowed as depreciafon under the Indian Income-tax
Act was larger and therefo-e in
computing
written down value as on
1-1-49 he took the sum allowed as depreciation
under the Indian Act
up to the end of 1944 and under the Indore Industrial Rules after that
date. In the assessments made for the per:od up to the end of 1944 the
respondent company had been treated as a non-resident and its taxable
income under the Indian Income-tax Act had been
worked out under
Rule 33 of the Indian Income-tax Act,
1922 as a fraction of its total
world income.
In determining the total world income the depreciation
claimable under the Indian Act had been allowed,
and it was tbe full
amount of this depreciation allowed against the total world income that
the Income-tax Officer took into account in determining the written down
value of the respondent company's assets for the purpose of the 1950.51
assesiment. The respondent company claimed that as only a fraction of
the total world income had been treated as
taxable income,
therefore
only a fraction of the depreciation allowed
against the world income
should be taken as having been 'actually allowed' in the terms of paragraph 2 of the Removal of fffficulties Order. The Income-tax Officer,
the Appellate Assistant Commissioner and the Appellate Tribunal having
rejected this plea the m1tter went in reference to the High Court. That
Court took the view contended for by the respondent viz. that only the
proportionate amount of deoreciation which was attributable to the taxw
able income could be taken °into account. The Revenue appealed to this
Court.
It was urged on behalf of the appellant that depreciation was allowed
in respect of the use of the assets in the busine5', that the allowance did
not depend on the as;e5'able income, and that the High Court therefore
went wrong in striking a proportion on tbe basis of a part of the income
926
SUPREME COURT
REPORTS
(1966] 2 S.C.R.
actually assessed under the Indian Income-tax Act. The different expressions used in various parts of paragraph 2 of the Removal of Difficulties
Order came for consideration.
H:ELD: Per Subba Rao and Sikri, JJ.-(i) The word "assessment"
used in the proviso to paragraph 2 has been given a very wide meaning
in decided cases. It means sometimes
'the
computation
of
income'.
sometimes the determination of the amount of tax payable; and sometime< the procedure laid down in the Act for imposing liability upon the
tax-payer. The proviso used ihe word 'assessment' both with reference
to Part B States and also with reference to the taxable territories.
But
in the present case the different shades of meaning of the said word were
not relevant.
For the purpose of computing
the
written down value,
the amount of depreciation allowed fOr the purpose of the assessment
only was relevant. [931 G-H; 932 A]
(ii) The key to the understanding of paragraph 2 is the expression
·a11owed'.
The expression 'actually
allowed'
in the main paragraph,
'allowed' in the proviso,
and 'taken into
account' in the Explanation
mean the same thing. What the Incom"-tax
Officer
has to take into
consideration in computing the written
down value is the depreciation
actually allowed under the Income-tax Act or the laws obtaining in Part
B States and adopt the greater of the two sums so allowed under that
head.
The determination of the depreciation actuaUy allowed under the
Income-tax Act for the years up to and including 1944 must depend on
the provisions of that Act. f932 BJ
(iii) Under the Income-tax Act depreciation allowance is in respect
of such assets as are used in the business and shall be calculated on the
written do~'n value, which means, in the case of assets acquired in the
previous year, the actual cost to the assessee, and in the case of assets
acquired before the previous year, the actual coot to the assessee less
all depreciation actually allowed to him under the Act. The allowance
towards depreciation is conditioned on the user of the assets, wholly or
in part, during the accounting year and thus contributing to the earning
of the income. Though it is not unrelated to the profits it does not depend upon the increase or decrease in the earning capacity of the assets,
but is only linked up with physical depreciation in their value.
Even so
only amount of depreciation actually allowed can be deducted from the
original co-;t of the assets to ascertain the written down value.
De hors
such an allowance,. it has no significance in income-tax law.
f932 F-H;
933 A-BJ
(iv) During the years up to and including 1944 the assessee was taxed a·s a non-reiident on the income which fell under s. 4(1) (a) or under
s. 4(1) (c), read with s. 42 of the Indian Income-tax Act. The assessee
was only assessed during the said years
in
re3pect of that part of its
QWfits which could be said to be attributable to the sale proceeds or
goods received in British India or in regard to wh~ch contracts were signed in British India.
Such income was brought to tax in terms of r. 33
of the Indian Income-tax Rules,
1922. The me'.hod adopted was
that
the amount of income for the purpose of Indian Income-tax was calculated on· an amount which bore the same prooortion to the total profits
of the busine1·s as the rece:p~s accruing or arisin~ in India bore to the
total receiots of the bus;ness. By apolying the formula
in
r. 33
the
Income-tax Officer had actu,lly allowed only a fraction of the amount
towards denreciation ailowable in asse~sing the
world
income of the
asse~see. The mere fact that in the matter
of calculation
the total
amount o.f depreciation was first deducted from the world income
and
thereafter the' proportion was struck in ter~s. of _r. 33 doe~ _not amount
to an actual allowance of the entire depreciation m ascertammg the taxA
... --
B
c
D
' '
E
F
G
H
...........
••
-
:
, -•.
C. I. T. V, NANDLAL MILLS
927
A
able income accrued in India. The Income-tax Officer could have adopted a different method by first ascertaining the gross income
accrued in
India and then deducting from it the allowance under the Act proportionate to the said income. Whatever method was adopted only a fraction of the total depreciation was actually
allowed in ascertaining the
taxable income in India. The view taken by the High Court was therefore correct. [933 B-H[
B
Hakumchand Mills Ltd. v. Commissioner of Income-tax
(Central)
c
D
E
F
G
H
Bombay, (1963) 47 I.T.R. 949, endorsed.
Per Shah, J. (dissenting)-Under s. 10 of the Income-tax Act taxable
profits or gains earned by an assessee under the head 'business' after
making appropriate allowances under 9Ub-s. (2) have to be computed.
One of such allowances is depreciation in respect of the assets used for
the purpose of business.
But depreciation dete'rmined according to the
mies merely enters into the computation of taxable profits, whether the
assessee is a resident or a non-resident.
In the assessment of a company
the same rates of tax apply under the Income-tax Act, whether the company is resident or non-resident. If the company is
resident
under
s. 4A( c) its entire world income would be chargeable, subject of course
to special exemptions like those provided in s. 14(2) (c) : if it is nonresident only a slice of the income would be chargeable. Under the
scheme of the Indian Income-tax Act depreciation like any other allowance has to be allowed in computing the total profit; after the total profit
is determined depreciation does not survive as a separate head of allowance. A part only of the total profit of a company determined in the
manner prescribed by s. 10, may be taxable.
But total profit being determined after depreciation is allowed, between the taxable
profits-which
may be a fraction of total profits-and depreciation there is no definable
relation. Therefore it is wrong to presume that the depreciation allowed
in the taxable territories which is to be taken into account under the proviso to paragraph 2 of the Removal of Difficulties Order is a fraction of
the depreciation considered for
computing total profits.
[940 E-H;
941 A-DJ
The fact that income was computed under r. 33 made no difference.
In the ascertainment of total profits either for the purposes of assessment
in the ordinary manner when the income of ·the assessee is determined or
when a fraction is to be adopted for the purpose of the second method
contemplated by s. 33, there is no scope for assum'ng that only a fcaction
of the. depreciation is actually ·allowed.
Depreciation is
deducted only
once and fur all. and it is deducted in determining the total profits of the
business. [942B-D]
There is therefore no warrant either in s. 10(2) (vi) or in paragraph
2 of the Removal'of Difficulties
Order or in r. 33 framed under the
Indian Income-tax Act for the view that the dep-eciation allowed is a fraction of the total depreciation of the business. [942 HJ
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 629 to
632 of 1964.
·
Appeals from the order dated September 22 1961
Madhya Pradesh High Court in Mi~c. Civil C~se No.
1960.
of the
277 of
A. V. Viswanatha Sastri, R. Ganapathy Iyer, B. R. G. K.
Achar and R. N. Sachthey, for the appellant.
928
SUPREME COURT REPORTS
(1966] 2 S.C.R.
S. T. Desai, T. A. Ramachandran, J. B. Dadachanji, for the
A
respondent.
The Judgment of SuBBA RAo and SrKRI, JJ. was delivered by
SuBBA RAo, J. SHAH J. delivered a dissenting opinion.
Sobba Rao, J. These appeals raise the question of construction of the provisions of the Taxation Laws (Part B States)
B
(Removal of Difficulties) Order, 1950, hereinafter called
the
Order, in the matter of computation of the aggregate depreciation allowances for the purpose of assessment to tax.
Nandlal Bhandari Mills Ltd., is a public company incorporated in Indore under the Indore Companies Act, 1914. It C
owns and runs a textile mill and some ginning factories.
The
Income-tax
Officer assessed the Company for the assessment
years 1950-51, 1951-52, 1952-53 and 1953-54 on its income of
the
corresponding
accounting
years,
being
the
calendar
years 1949, l950, 1951 and 1952.
In the course of the
assessments it became necessary to ascertain the written-down
D
value of the building, machinery, plant etc. of the respondent
company as on January 1, 1949. On April 1, 1950, the Indian
Income-tax Act, 1922, was extended to Part B States, including
Madhya Bharat of which Indore became a part.
Till the said
date, the assessee was for many years assessed in the Companies
Circle, Bombay, as a non-resident and for some years as a resiE
dent under the Indian Income-tax Act,
1922. It was also
assessed to Industrial Tax under the Indore Industrial Tax Rules,
1927.
For those years in which it was assessed as a non-resident under the Indian Income-tax Act, 1922, only that part of
its profits which could be said to be attributable to the sale proceeds of goods received in British India or in regard to which
F
contracts
were accepted in British India was brought to tax.
After the Indian Income-tax Act was extended to Indore, difficulties arose in the matter of fixing depreciation allowances, for
the rates obtaining under the Indian Income-tax Act and those
obtaining under the Indore Industrial Tax Rules, 1927, were not
the same.
After the merger of the State in the Indian Union,
G
in order to rationalize the tax structure, the Central Government
in exercise of the power conferred on it under s. 12 of the Finance Act, 1950, issued the Order whereunder in the case of such
disparity the greater of the two sums allowable was directed to
be adopted.
During the assessment years, pursuant to the terms
of that Order, the Income-tax Officer took into account the depreH
ciation allowances for the years
up to and including 1944 as
computed under the Indian Income-tax Act, 1922, and for the
'
" '
,
-
•
c. I. T. v. NANDLAL MILLS (Subba Rao, !.)
929·
A subsequent years 1945 to 1948, the depreciation allowance as
computed under the Indore Industrial Tax Rules, 1927.
On
that basis he arrived at the written-down value of the building, plant, machinery etc. of the assessee as on January 1, 1949.
On appeals, the Appellate Assistant Commissioner and, on further appeals, the Appellate Tribunal, confirmed the orders of the
B Income-tax Officer.
At the instance of the assessee, the following questions, among others, were referred to the High Court of
Madhya Pradesh, Jabalpur :
c
D
F
( 1) Whether the computation of the written-down
value of the assets of the applicant in the light
of the provisions of the Taxation Laws (Part B
States) (Removal of Difficulties) Order, 1950,
is legal and valid.
(2) Whether the provisions of the Taxation Laws
(Part B States) (Removal of Difficu'ties) Order,
1950, and the subsequent modifications thereof
were valid in law in the light of the provisions
of the Indian Income-tax Act, 1922, the Finance
Act, 1950, and the Constitution of India.
(3) Whether the Indore Industrial Tax Rules, 1927,
could be regarded as rule or law of a Part B
State for the purpose
of the said
Taxation
Laws (Part B States) (Removal of Difficulties)
Order, 1950, and, if so, whether the same are
valid in law; and
( 4) Whether the depreciation
'actually
allowed'
means the depreciation deducted in arriving at
the taxable income or in arriving at the world
income.
Before the High Court the third question was not pressed; and
the second question was concluded by the decision of this Court
G in Commissioner of Income-tax, H.vderabad v. Dewan Bahadur
Ramgopal Mills Ltd.('). The correctness of the answers given
~y the High Court in respect of these two questions is not questioned before us and, therefore, nothing further need
be said
about them here.
Q.uestions I and .4, in substance, form two parts of the same
H
q~e~uon. On quest10n 1, the High Court held that the depreciation allowed for the years up to and including 1944 in the
(I) [1962] 2 S.C.R. 318 : [1961] 41 I.T.R. 28J.
930
SUPREME COURT REPORTS
[1966] 2 S.C.R.
assessments made in the taxable territories would be the depreA
dation which was actually allowed against the taxable income
and not the depreciation computed against the total world income.
On the 4th question, it answered that the depreciation
actually allowed meant the depreciation deducted in arriving at
the taxable income.
The present appeals filed by the Revenue
·question the correctness of the answers given by the High Court B
in regard to questions 1 and 4 referred to it.
Mr. A. V. Viswanatha Sastri, learned counsel for the Revenue, argued that the assessee was only entitled to depreciation
on the written-down value calculated after deducting all the
amounts of depreciation that had been taken into consideration
C
in determining the world income.
He argued that depreciation
was allowed in respect of the user of the assets in the business,
that the allowance did not depend en the assessable income and
that the High Court, therefore, went wrong in striking a proportion on the basis of a part of the income actually assessed under
·the Indian Income-tax Act.
D
Mr. Desai, learned counsel for the assessee, contended that
no depreciation as such having been allowed for the years upto
and including 1944 as computed under the Indian Income-tax
Act, the original cost itself should be taken as the written-down
value of the assets.
Alternatively, he argued that in any event E
only 1hat part of the depreciation which had entered into the
·comp11tation of income found liable to income-tax under the
Indian Income-tax Act, which income was calculated on proportionate basis alone, should be deducted from the original cost in
determining the written-down value under s. 10(5) (a) of the
Indian Income-tax Act.
F
We shall deal with questions 1 and 4 together, as, as we have
indicated earlier, they are really parts of the
same question.
The answer to the questions turns upon the interpretation of
the provisions of the Order.
It is, therefore, necessary to read
the relevant provisions of the Order.
Paragraph 2. Computation 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 Jaws or rules of a Part B State relating to
income-tax and super-tax, or any law relating to tax
on profits of business, shall be taken into account in
computing the aggregate depreciation allowance referG
H
'
1:;
~· f ·>.--
..
~r:.·
•
'{
'
.,-, ..
- ~
,
-
I -
'
A
B
c
D
c. I. T. v. NANDLAL MILLS (Subba Rao, l.)
S31,
red 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:
Provided that where in respect of any asset, depreciation has been allowed for any year, both in the
assessment made in the Part B State and in the taxable
territories, the greater of the two sums allowed shall
only be taken into account.
Explanation.-For the purpose of this paragraph,
the expression "all depreciation actually allowed under
any Jaws or rules of a Part B State" means and shall
be deemed always to have meant the aggregate allowance for depreciation taken into account in computing the written-down value under any laws or rules
of a Part B State or carried forward under the said
laws or rules.
After the Indian Income-tax Act, 1922, was extended to the
Indore State, difficulties arose in the matter of fixing the allowances for depreciation.
The rates of depreciation under the Act
and under the Order were not the same.
Paragraph 2 of the
Order provides that in making an assessment under the Act all
E depreciation allowances actually allowed under the laws obtaining
in the Part B State before the Act was extended to it shall be
allowed.
The proviso thereto says that when there is a conflict
between the two rates, the greater of the two sums allowed shall
be taken into account.
The Explanation to t\ie section defines
the expression "all depreciation actually allowed under any laws
F
or rules of a Part B State" to mean the aggregate allowances for
depreciation taken into account in computing the written-down
value under the laws prevalent in the Part B State or carried
forward under the
said laws or rules.
The argument turned·
upon the following expressions in the said paragraph : "actually
allowed" in the main part of the paragraph; "allowed in
the
G assessment" in the proviso; and "taken into account in computing·~
in the Explanation.
It is true that decided cases have given a
very wide meaning to the word "assessment".
It means sometimes "the computation of income"; sometimes, the determination of the amount of tax payable; and sometimes, the procedure
laid down in the Act for imposing liability upon the taxpayer.
H The proviso used the word "assessment" both with reference to.
Part B States and also with reference to taxable territories. But
we are really not concerned with the shades of meaning the said•
932
SUPREME COURT
REPORTS
[1966] 2 S.CR.
word bears under the Act For the purpo&e of computing the
A
written-down value, the amount of depreciation allowed for the
purpose of the assessment is only relevant. The key to the
understanding
of
the paragraph is the expression "allowed''.
The expression "actually allowed" in the main paragraph,
"'allowed" in the proviso, and "taken into account" in the Explanation mean the same thing.
What the Income-tax Officer has
B
to take into consideration in computing the written-down value
is the depreciation actually allowed under the Income-tax Act or
the Jaws obtaining in Part B States and adopt the greater of the
two sums so allowed under that head.
It was conceded that the
rates under the Indian Income-tax Act were higher for
some
years than those obtaining under the laws in force in the Indore
State. The question, therefore, is what was the amount actually
allowed to the assessee towards depreciation under the Incometax Act during the years up to and inclusive of 1944.
This
would depend upon the provisions of the Indian Income-tax Act.
Under s. 10(2) of the Indian Income-tax Act, profits or gains
of business shall be computed after making the allowances enumerated therein.
Under cl. (vi}, in respect of depreciation of
such buildings, machinery, plant or furniture being the property
of the assessee, a sum equivalent to such percentage on the origic
D
nal cost thereof to the assessee as may in any case or class of
cases be prescribed and in any other cases, to such percentage
E
on the written-down value thereof as may in any case or class
of cases be prescribed be allowed. Under s. 10(5) (b), "writtendown value" means in the case of assets acquired before the
"previous year' the actual cost to the assessee less the depreciation
actually allowed
to him under the Act.
Under the Indian
Income-tax Act, income is to be charged to tax without reference I
to diminution in the value of capital or the wear and tear involved in the user of the assets; but in respect of specified assets
like building, machinery, plant and furniture etc., the Act grants
an allowance in the manner
prescribed
thereunder.
Depreciation a11owance is in respect of such assets as are used in the
business and shall be calculated on the written-down
value,
G
which means, in the case of assets acquired in the previous year,
the
actual
cost to
the
assessee
and,
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 Act.
The allowance towards depreciation is conditioned on the user of the assets, wholly or in part, during the
B
accounting year and thus contributing to the earning of the
income. Though it is not unrelated to the profits, it does not
'
'
..
.- :,_:;,: __
•
-..
.•
-
c. I. T. v. NANDLAL MILLS (Subba Rao, J.)
933
A depend upon the increase or decrease in the earning capacity of
the assets, but is only linked up with physical depreciation in
their value.
Even so, only the amount of depreciation actually
allowed can be deducted from the original cost of the assets to
ascertain the written-down value.
De hors such an allowance,
it has no significance in the income-tax law.
So the question is,
B what was allowed as depreciation by the income-tax authorities
in the computation of the taxable income upto and inclusive of
the year 1944 ? During the said years the assessee was taxed
as a non-resident on the income which fell under s. 4 (I)( a) or
under s. 4(1)(c), read withs. 42 of the Indian Income-tax Act.
The assessee was only assessed during the said years in respect
C of that part of its profits which could be said to be attributable
to the sale proceeds or goods received in British India or in
regard to which contracts were accepted in British India. Such
income was brought to tax in terms of r. 33 of the Indian
Income-tax Rules, 1922.
Under the said rule,
if the
actual
amount of the income, profits or gains accruing or arising to a
D non-resident cannot be ascertained, the amount of such income,
profits or gains for the purposes of assessment to income-tax may
be calculated on such percentage of the turnover so accruing or
arising as the Income-tax Officer may consider to be reasonable,
or on an amount which bears the same proportion to the total
g
profits of the business of such person, such profits being computed
in accordance with the provisions of the Indian Income-tax Act,
as the receipts so accruing or arising bear to the total receipts
of the business, or in such other manner as the Income-tax Officer
may deem suitable. Under this provision the Income-tax Officer
could proceed thereunder only if he could not ascertain the actual
i' amount of the income, profits or gains accruing or arising to a
non-resident. If he could not, he could adopt one or other of the
three methods mentioned in the rule to ascertain the said
income.
Two of the said methods permit the Income-tax Officer
to make a reasonable or suitable estimate of such income. But,
under the third method, which was adopted in the present case,
G the amount of such income for the purpose of income-tax shall
be calculated on an amount which bears the same proportion to
the total profits of the business of such person as the receipts
so accruing or arising bears to the total receipts of the business.
The working out of this method may best be understood by an
illustration.
Suppose the total profit of a business is Rs. 100/ •
ff and the receipt in India is Rs. 25/-, i.e., the income accrued in
India is one-fourth of the total income. If a sum of Rs. 5 / •
represents the depreciation of the assets used in the business and
934
SUPREME COURT
REPORTS
[1966[ 2 S.C.R.
if this is allowed, the total income will be Rs. 95/-; and onefourth of Rs. 95/- is Rs. 23-75: that is the income accrued in
India under this formula.
In arriving at Rs. 23. 75 as the income
in India, only Rs. 1.25, which is one-fourth of Rs. 5/-, the total.
depreciation, is deducted from Rs. 25 /- towards the depreciation,
.that is to say, only Rs. 1.25 is actually allowed towards depreciation.
The same illustration may also be put in another way.
Rs. 25/- is the gross income accrued in India to a non-resident;
Rs. 5 /- is the value of the depreciation on the total assets.
By
taking one-fourth of Rs. 5/-, i.e., Rs. 1.25, we get at the figure
A
B
of Rs. 23.75, that is to say, only one-fourth of the amount representing depreciation is allowed in ascertaining the taxal;>k
C
income in India. It is, therefore, manifest that the Income-tax
Officer, who applied the formula laid down in r. 33 of the Incometax Rules, 1922, in fixing
the depreciation allowance,
had
actually allowed only a fraction of the amount towards depreciation allowable in assessing the world income of the assessee.
But the learned counsel for the Revenue contended that the
D.
entire depreciation of the assets was taken into consideration in
computing the taxable income and, therefore, the entire amount
should have been taken into account by the Income-tax Officer
in arriving at the written-down value of the assets.
It appears
that the Income-tax Officer in assessing the non-resident upto
1944 had, in calculating the total world income of the assessee.
E
allowed the entire amount of depreciation; thereafter, he arrived
at the taxable income in India by the application of r. 33.
As
we have pointed out, the mere fact that in the matter of calculation the total amount of depreciation was first deducted from
the world income and thereafter the proportion was struck in
F
terms of r. 33 does not amount to an actual allowance of the
entire depreciation in ascertaining the taxable income accrued in
India.
The Income-tax Officer, as we have pointed out earlier.
could have adopted a different method by first ascertaining the
gross income accrued in India and then deducting from it the
allowance under the Act proportionate to the said income. WhatG;
ever method was adopted, only a fraction of the total depreciation was actually allowed in ascertaining the taxable income in
India.
Learned counsel for the assessee contended that under the
method adopted in terms of r. 33 of the Income-tax Rules, I 922.
no depreciation was allowed at all in ascertaining the taxable
H:
income in India, for that was only taken into consideration in
arriving at the total world income.
1
·~
,,.
j;
~
*:
-·•·
......
.
,
C. l. T. v. NANDLAL MILLS (Shah, J.)
935
A
We cannot accept this argument-we may say that the learned counsel did not press this point seriously either. As we have
indicated earlier, only a fraction of the amount of depreciation
was actually allowed in the assessment of the income accrued in
India.
We do not propose to express any opinion on the question whether, if the other methods suggested in r. 33 of the Rules
B
were adopted, it could be held that no depreciation was actually
allowed in making the assessment.
Our conclusion finds support in the judgment of the Bombay
High Courc in Hakumchand Mills Ltd. v.
Commissioner of
Income-tax (Central), Bombay('). We endorse the view expressC
ed therein.
D
E
F
In the result, we hold that the High Court has given correct
answers to questions l and 4 referred to it.
The appeals fail
and are dismissed with costs.
Shah, J.
The respondent, a public limited company was
incorporated in the former Indian State of Indore.
The Company was being assessed to pay income-tax in the Indore State
under the Indore Industrial Tax Rules, 1927, on profits earned
in its business of manufacturing: cotton textiles.
In assessing
tax under the Industrial Tax Rules the Tax Officer of the Indore
State allowed depreciation on the assets at rates prescribed by the
Industrial Tax Rules.
The Company was also assessed to tax
in British India under the Indian Income-tax Act, 1922, for some
years as a resident and in others as a non-resident.
The State
of Indore became a part of the United States of Gwalior, Indore
and Malwa in May, 1948, and the United States
of Gwalior,
Indore and Malwa became on January 26, 1950 a constituent
State in the Indian Union as part of the Part B State of Madhya
Bharat.
The Finance Act, 1950 by s. 13 repealed the Taxation Laws
in force in the territories of the Part 'B' States.
In proceedings
G
for assessment under the Indian Income-tax Act for the assessment years 1950-51, 1951-52, 1952-53 and 1953-54, the Incometax Officer worked out the written-down value of the buildings,
plant and machinery of the Company on January 1, 1949 by
taking into account the depreciation allowed under the Indian
Income-tax Act, 1922, till January 1, 1945, and thereafter the
H
depreciation allowed under the Indore Industrial Tax Rules, and
assessed
tax on that footing.
The order of the
Income-tax
-~-----·----
(!) [1963] 47 l.T.R. 949.
USnp. Cl./66-13
936
SUPREME COURT
REPORTS
[1966) 2 S.C.R.
Officer was confim1ed by the Appellate Assistant Co1umissioner
A
and the Income-tax Appellate Tribunal.
The Tribunal referred under s. 66 ( 1) of the Indian Income~
tax Act four questions to the High Court of Madhya Pradesh at
Jabalpur.
The High Court did not answer questions Nos. 2 &
3, because one of the questions in view of the judgment of this
R
Court [Commissioner of Income-tax v. Dewan Bahadur Ramg@pal Mills(')) did not require consideration, and the other was
not canvassed.
The ~wo other questions are :
"( 1) Whether the computation of the written-down
value of the assets of the applicant in the light of the
provisions of Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 is legal and valid ?
( 4) Whether the depreciatiun
'actually
allowed'
means the depreciation deducted in arriving
at the
taxable income or in arriving at the world income?"
The High Court recorded on the first question the answer that
depreciation allowed in the years up to and inclusive of the year
1944 in the assessment made in the taxable territories would be
the
depreciation
which
was
actually
allowed
against
c
D
the total income and not the depreciation computed against the
total world income, and on the fourth question that the depreE
ciation 'actually allowed' means depreciation deducted in arriving at the taxable income.
With certificate granted by the High
Court, this appeal has been preferred.
Under the Indore Industrial Tax Rules, 1927, depreciation
was allowed at certain rates in respect of buildings, plant and
F
machinery.
By s. 10(2) (vi) of the Indian Income-tax Act in
computing profits or gains of a business, depreciation allowable
in respect of buildings, machinery, plant and furniture used for
the purpose of business being the property of the assessee, is a
sum equivalent to such percentage on the original cost thereof
to the assessee as may in any case or class of cases be prescribed
G
and in any other case, at such percentage on the written-down
value thereof as may in any case or class of cases be prescribed.
By sub-s. (5) of s. 10, written-down value in sub-s. (2) is defined.
By virtue of s. 4A(c) a company is regarded as resident in the
taxable territories in any year (i) if the control and management of its affairs is situated wholly in the taxable territories in
H
that year, or (ii) if its income arising in the taxable territories
(I) [1962] 2 S.C.R. 318 : 41 l.T.R. 280
'"'
l
.~1
C. I. T. V. NANDLAL MlLLS (Shah, J.)
937
A in that year exceeds its income arising without the taxable territories in that year.
Control and management of the affairs of the Company was
at all material times situated at Indore, but in the years in which
its British Indian income exceeded the income without British
B India, the Company was treated as resident for the purpose of
the Indian Income-tax Act, and in the other years it was treated
as non-resident.
In assessing income of the Company under the
Indian Income-tax Act in the years before 1950, the Income-tax
Officer had, whether the Company was assessed as resident or
non-resident, to ascertain its world income, and for that purpose
C to take into account the depreciation allowable under s. 10(2)
(vi) read with s. 10(5)(b). Depreciation allowance in respect
of the profits of the Company was therefore computed before the
Indian Income-tax Act, 1922, was made applicable to the territory of the State of Indore by the Finance Act, 1950, under two
different statutes-the Indian Income-tax Act, and the
Indore
D
Industrial Tax Rules, and in the assessment year 1950-51 there
were two different sets of written-down values of the buildings,.
plant and machinery of the Company.
· To remove anomalies arising from the application
of
the·
E Income-tax Act in the computation of taxable income of assessees
from the Part B States, the Central Government issued under s.
12 of the Finance Act, 1950, the Taxation Laws (Part B States)
(Removal of Difficulties) Order, 1950.
Paragraph 2 of that
Order as originally promulga-ted read as follows :
F
G
H
"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 law relating to tax
on profits of business, shall be taken into account in
computing the aggregate depreciation allowance 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:
Provided that where in respect of any asset, depreciation has been allowed for any year both in
the
assessment made in the Part B State and in the taxable
territories, the greater of the two sums allowed shall
only be taken into account."
938
SUPREME COURT
REPORTS
[1966] 2 S.C.R.
But the expression "all depreciation actually allowed under any
A
laws or rules of a Part B State" in paragraph 2 was ambiguous.
The Central Government purported to issue a notification under
s. 60A of the Indian Income-tax Act incorporating an Explanation to paragraph 2, but the notification was declared by the
High Court of Hyderabad as invalid: S. V. Naik v. Commissioner
of Income-tax, Hyderabad(').
Thereafter, the Central GovernB
ment issued an amendment to the Order in exercise of the powers
under s. 12 of the Finance Act, 19 50, and ineldrporated !an
Explanation with retrospective operation.
The Explanation
which became effective from May 8, 1956, provided:
"For the purpose of this paragraph, the expression
c
"all depreciation actually allowed under any laws or
rules of a Part B State" means and shall be deemed
always to have meant the aggregate
allowance for
depreciation taken
into
account in computing the
written-down value under any laws or rules of a Part
B State or carried forward under the said laws or
D
rules."
By the Explanation it was sought to evolve a method of calculation of depreciation under the law or rules in force in a Part 'B'
State : it was in effect a definition clause. Therefore if before
the application of the Income-tax Act, an assessee in a Part 'B'
E
State was being assessed to tax only under a State law, depreciation actually allowed had to be taken into account for ascertaining
the written-down value of buildings, plant and machinery in the
assessment year 1949-50 : if he was assessed under the Indian
Income-tax Act as well as the State law, in determining the
appropriate written-down value, the proviso to paragraph 2 had
F
to be applied, and depreciation actually allowed under the State
.law had to be compared wi~h the depreciation actually allowed
under the Indian Income-tax Act. The expressions "depreciation
actually allowed under any law or rule of a Part B State" in
the first clause, and the expressions "depreciation has been allowed
. . . . in the assessment in tlte Part B State" in the proviso have
G
in relation to any year of assessment the same connotation.
That is common ground. The point in dispute is about the true
import of the expression "depreciation . . . allowed for any
year
. . . in the taxable territories".
The normal scheme of
depreciation under the Income-tax Act is that depreciation progressively decreases every year, being a percentage of the writtenH
down value,
which in the first year is the actual cost to the
(1)20 I.T.R,2G6-
;
L
C. I. T. v. NANDLAL MILLS (Shah, J.)
939
A assessee, and in the years following the actual cost less all depreciation allowed under the Income-tax
Act, 1922, or any Act
repealed thereby: see s. 10(5) (b). The Indore Industrial Tax
Rules were, however, repealed by the Finance Act, 1950 and not
by the Income-tax Act, and the definition of written-down value
in s. 10 ( 5 )(b) was in terms inapplicable, and depreciation had
B to be calculated under the special machinery prescribed by the
proviso to paragraph 2 of the Taxation Laws (Part B States)
( Renloval of Difficulties) Order, 1950, when assessment
of
income had been made both under the State law and the Indian
Income-tax Act, 1922.
C
In determining the written-down value of the buildings, plant
and machinery of the Company, the Appellate Tribunal held that
the expression "actually allowed" in paragraph 2 means deprecia·
tion which is availed of for the purpose of assessment of tax,
and not merely a fraction of tho total depreciation allowance
taken into account in levying charge upon a part of the taxable
D income at a rate determined by the total world income.