# MAHADEV A UPENDRA SINAI ETC. ETC v. UNION OF INDIA & ORS

- **Citation:** [1975] 2 S.C.R. 640
- **Court:** Supreme Court of India
- **Decided:** 1974-11-07
- **Case number:** Writ Petitions Nos. 112, 391-394 of 1971
- **Bench:** A. N .Ray, K. K. Mati!Ew, A. Alagiriswami, P. K. GoswA!vlJ, R. S. Sark.Aria
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/mahadev-a-upendra-sinai-etc-etc-v-union-of-india-ors-6202
- **Pages:** 27

## Headnote

Ttixatic11 Laws (Extmsion to Union Territories) (Removal of Difficulties)
Order 1970 Cl. (3), prol'iso (2)-lf ultra virts Taxation laws (Extemion to
Union Ttrrltorlts) Regulatfon Ill of 1963.
A
B
Goa, Daman and Diu, erstwhile Portuguese territodes became a Union Territory of ~ Indian Union on December 19, 1961.
The President of Jndia, in
exercise of tho powers under Art. 240 promulgated the Taxation Laws (Extension
to Union Territories)
Regulation II of 1963.
By cl. 3 of the Regulation, the
C
Indian Income Tax Act, 1961, was extended to the Union Territory. By cl. (4)
the corresponding law in the Union Territory was repealed from April 1, 1963.
aause (7) provided that if any difficulty arose in giving effect in the Union Territory, to the provisions of any Act etc., the Central Government may, by general or special order give necessary directions for tho removal of the difficulty.
·The petitioners were carrying on business in the Union Territory, where there
wil3 a Portugue!;C law rtlating to levy of tax, tho scheme of which was entirely
different from the Indian Act.
Under that law, the net profits and sains were
D
not calculated b\lt a tax was levied at a certain percentage on tho gross in.::ome or
tnmover of the business irrC!lpectivc of whether the asscssee made any profits or
suffered losses.
·
After the extension of the Indian Act. the petitioners were assessed under it
from the assessment year 1964-65 onwards. The assessee was allowed depreciation of the assets used by him for bis business on tho basis of the 'written down
value' under s. 43(6)(b) read withs. 32 of the .Income Tax Act.
Section 32 adopts two methods in allowing depreciation. Jn the case of nonE
.ocean going ~hips and buildings, machinery, plant or furniture, lb: prescribed
percentage of depreciation is to be' computed on the basis of th~ written down
value of the asset.
Section 43(6) defin~ 'written down value' to mean (a) in
the case of asset5 acquired in the previous year, the actual cost and ( b) in the
case of assets before the previous year, the actual cost less al! depreciation actually allowed under the 1961-Act or under the 1922-A>:t or any Act repea 'ed by that
. Act or under any executive orders. Where the asset was acquired in the previous
year depreciation would be allowed ·at the prescribed rate on stich cost. and in
F
subsequent years, the depreciation iYouJd be calculated on the basis of actual cost
less depreciation actually all owed.
·For the assessment year 1964-65, in assessing the petitioner, the written down
value was taken as the actual cost of the assessee's assets since no depreciation
was actually allowed to him earlier and the written down value was progressively
reduced in the succeeding years by deducting the depreciation actually allowed in
the preceding year.
On Nov. 8, 1970, the.Central Government, in purported exercise of its powers
under cl. (7) of the Regulation, promulgatect the Taxation Laws (Extension to
Union Territories) (Removal of Difficulties) Order. It provided in cl. (3) that
in making any assessment under the Income Tax Act, 1961, .all depreciation ac·
tuany allowed under the local laws &hall b! taken into account in compnting the
deductions, and in the proviso 2 to d. (3 ), that, where in respect of any period
no depreciation was actually allowed under the local law, dtprtclation for that
puiod shall be calculated at the rott under the Indian Income Tax, 1961, or the
1922 Act or any Act r~pcaled by that Act or under any executive orders issued
when the Indian Income Tax Act, 1886, was in force, and the depreciation shall
be deemed to be the depreciation actually allowed under tlie local law.
In the
light of proviso 2 to cl. (3) of th" 1970 Order, tho assessment already made of
tlte petitioner were !!Ollgbt to b~ revised, so that, the written down value of the
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M. u. SINAI v. UNION (Sarkaria, I.)
641
assets for calculating the depreciation allowance-even for the first time when the
petitioners

## Text

_Characters 0–39,870 of 87,392. This is a partial read: ask again with offset=39870 for what follows._

640
MAHADEV A UPENDRA SINAI ETC. ETC.
v.
UNION OF INDIA & ORS.
November 7, 1974
[A. N .RAY, C.J., K. K. MATI!EW, A. ALAGIRISWAMI, P. K. GoswA!vlJ.
AND R. S. SARK.ARIA, JJ.J
Ttixatic11 Laws (Extmsion to Union Territories) (Removal of Difficulties)
Order 1970 Cl. (3), prol'iso (2)-lf ultra virts Taxation laws (Extemion to
Union Ttrrltorlts) Regulatfon Ill of 1963.
A
B
Goa, Daman and Diu, erstwhile Portuguese territodes became a Union Territory of ~ Indian Union on December 19, 1961.
The President of Jndia, in
exercise of tho powers under Art. 240 promulgated the Taxation Laws (Extension
to Union Territories)
Regulation II of 1963.
By cl. 3 of the Regulation, the
C
Indian Income Tax Act, 1961, was extended to the Union Territory. By cl. (4)
the corresponding law in the Union Territory was repealed from April 1, 1963.
aause (7) provided that if any difficulty arose in giving effect in the Union Territory, to the provisions of any Act etc., the Central Government may, by general or special order give necessary directions for tho removal of the difficulty.
·The petitioners were carrying on business in the Union Territory, where there
wil3 a Portugue!;C law rtlating to levy of tax, tho scheme of which was entirely
different from the Indian Act.
Under that law, the net profits and sains were
D
not calculated b\lt a tax was levied at a certain percentage on tho gross in.::ome or
tnmover of the business irrC!lpectivc of whether the asscssee made any profits or
suffered losses.
·
After the extension of the Indian Act. the petitioners were assessed under it
from the assessment year 1964-65 onwards. The assessee was allowed depreciation of the assets used by him for bis business on tho basis of the 'written down
value' under s. 43(6)(b) read withs. 32 of the .Income Tax Act.
Section 32 adopts two methods in allowing depreciation. Jn the case of nonE
.ocean going ~hips and buildings, machinery, plant or furniture, lb: prescribed
percentage of depreciation is to be' computed on the basis of th~ written down
value of the asset.
Section 43(6) defin~ 'written down value' to mean (a) in
the case of asset5 acquired in the previous year, the actual cost and ( b) in the
case of assets before the previous year, the actual cost less al! depreciation actually allowed under the 1961-Act or under the 1922-A>:t or any Act repea 'ed by that
. Act or under any executive orders. Where the asset was acquired in the previous
year depreciation would be allowed ·at the prescribed rate on stich cost. and in
F
subsequent years, the depreciation iYouJd be calculated on the basis of actual cost
less depreciation actually all owed.
·For the assessment year 1964-65, in assessing the petitioner, the written down
value was taken as the actual cost of the assessee's assets since no depreciation
was actually allowed to him earlier and the written down value was progressively
reduced in the succeeding years by deducting the depreciation actually allowed in
the preceding year.
On Nov. 8, 1970, the.Central Government, in purported exercise of its powers
under cl. (7) of the Regulation, promulgatect the Taxation Laws (Extension to
Union Territories) (Removal of Difficulties) Order. It provided in cl. (3) that
in making any assessment under the Income Tax Act, 1961, .all depreciation ac·
tuany allowed under the local laws &hall b! taken into account in compnting the
deductions, and in the proviso 2 to d. (3 ), that, where in respect of any period
no depreciation was actually allowed under the local law, dtprtclation for that
puiod shall be calculated at the rott under the Indian Income Tax, 1961, or the
1922 Act or any Act r~pcaled by that Act or under any executive orders issued
when the Indian Income Tax Act, 1886, was in force, and the depreciation shall
be deemed to be the depreciation actually allowed under tlie local law.
In the
light of proviso 2 to cl. (3) of th" 1970 Order, tho assessment already made of
tlte petitioner were !!Ollgbt to b~ revised, so that, the written down value of the
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M. u. SINAI v. UNION (Sarkaria, I.)
641
assets for calculating the depreciation allowance-even for the first time when the
petitioners were assessed under the 1961-Act-would not be the actulll cost of
. the RBSets, but .a far lower sum with proportionate increase in the petitioner's
liability to tax since the assessmept year 1%4·65,
The petitioner therefore challenged the validity of Proviso 2 to Cl. ( 3) of the
Taxation laws (Extension to Union Territories) (Removal of Difficulties) Order
1970.
•
(Per A. N. Ray, C.J., K. K. Mathew, P. K. Goswami and R. S. Surkaria, JJ.).
HELD : Allowing the Petitions;
The 2nd Proviso to cl. (3) of the 1970-0rder is ultra vires the Central Gov·
ernment when exercising its powers under cl. (7) of Regulation ll1 of 1963, and
the Revenue is not entiUed to levy tax on the basis of the depreciation allowance computed in accordance with the said Proviso. [659E·F]
( 1) To keep pace .with the rapidly increasing responsibilities of a welfare de.
mocratic state, the legislature bas to turn out a plethora of hurried legislation. It
is well nigh impossible, e8pecially when the legislature deals with socio-economic
all(ivities of the State or extends existing Indian laws to territories freshly merged
in the Indian Union, to foresee all the circumstances to deal with which a statute
is enacted or (o anticipate all the difficulties that might arise in its working due to
peculiar local conditions. In order to obviate the necessity of approaching the
legislature for removal of every difficulty however trivial, encountered in the enforcemeru of the statute, the legislature invests the Executive with power lo remove difficulties' for making the implementation of the statute effective by mak·
iog minor adaptations apd peripheral adjustments in the statute without touching
ils substance. [653D·HJ
(2) The existence or arising of a 'difficulty' is the si11e qua non for the exercise
of the power under cl. 7 of the 1963-Regulation. The 'difficulty' contemplated
by the clause must be a difficulty arising in gfring effect to the provisions of the
Act and not a difficulty arising a/i11rule.
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 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. Under the guise of removing a diff·
culty, it ca-nnot. change the scheme and essential provisions of the Act.
[653H·
654B)
(3) The contention that but for the impugned proviso, the provisions of ss.
32 and 43(6)(b) of the 1961-Act, on its extension to the Union Territory, could
not be given· effect to and applied to the petitioner must be rejected. There could
be no difficulty in computing the 'written down value' under s. 43(6)(b) of the
assets that had been acquired by the petitioner before the previous year.· Since
no ·depreciation was, in fact, allowed to the petitioner in the past under the Portuguese law, in the first ~ent under the Indian Act, the written dow.n value
would be the actual cost of the assets less nil. Thereafter, in each suoceediog year,
the depreciation actually allowed in the preceding year would be deducted causing
yearly diminution of the written down v.alue with consequent decrease in. the di- ,:J
preciation allowed on that basis. This was 'exactly the manner in which .the 'wri.
ten down value' of the assets of the petitioner had been computed and depreciation . allowed for the several assessment years from 1964-65 onwards, showing
that there was no difficulty in applying the provisions. [6SSH-6S6D}
.
( 4) There is no basis for the argument that the impugned proviso brings about
equality of treatment among the different assessees in India. Far from ensuring
parity of treatment it puts the .assessec in the Union territories in a worse position
than the assessces In the rest of India.
[6560-F}
·
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Straw Products Ltd. v. Income-tax Officer, Bhopal, (1968] 2, S.C.R. I followed.
Commissioner of Income-tax; Hyd"abad v. Dewan Bahadur Ram Gopal Mills
I.Id. [1961} 2 S.C.R. 318 at 325 & 326 distingukhe~.
·
642
SUPJU!MB COURT REPORTS
[1975] 2 s.c.R.
The phras~ 'actually allowed' is limited to the depreciation ac111a/ty 1akt11 imo
acco11nt or gra11ted or given e/}ect tn and •Cannot be stretched to mean 'notionally
allowed'. In th.is Union Territory, under the Portuguese law no depr<X:iation was
ever computed or actually allowt'Ci to the as~sees. ~e impugned proviso, by
replacing depreciation 'actually allowed' with depreciation 'deemed to have been
allowed,' by a fiction of law, eve:n where no depreciation was at all aHowed, in
effect, attempts to change the fundamental scheme of the Indian Act in its application to the assessees in the Unio11 Territory of Goa, Diu and Daman. [658B·El
( 6 ) Under s. 32 (2) of the Indian focome Tax Act an assessee is entitled to
'carry iorward' unabsorbed depreciation in case of loss or inadequate profits, with·
out any time limit, For ensuring this right to an assessee, assessments for ascer·
taining losses or insufficiency of profits of his business, since the acquisition and
use of the assets by him, will have to be made. In the Union Territory of Goa
etc., during the interregnum between Dec. 19, 1961, and April I, 1963, there was
no law authorising the levy of inr.ol,1\e tax. Even under the Portuguese law, the
tax was in reality a 'turn over' tax irrespective of the assessee making profit or
loss. Retrospective assmments for the purpose, ~oing back to a period prior to
1963, could have been made onde:r a law of Pathament but not under an cxecu·
tive fiat.
But, in the Indian Income Tax Act as extended to these territories,
there is no provision for ~aking assessment in respect of those past years. In the
absence of such law, it is impossible to work the Proviso without riding rough
shod over the rights of the asscssec:s to have their unabsorbed depreciation relating
to. the pre-1963 period, carried forward. Therefore a Goan asses.sec, who· suffered losses and depreciation of his assets will never get the benefit of such carry
forward, as ocl machinery exists for determining the inadequacy of profits or the
factum of losse<J in those years. Viewed from this angle, the impugned. proviso
would, in the implementation of the Act,· create difficulties rather than remove
them. [6S9A-E]
(Per A/afiiris11·a111i. J., dissenting).
HELD : Dismissing the petition,
(I) The provision regarding written down value and allowance of depreciation under tho Indian Income Tax law proceeds on the basis of depreciation al·
lowed year br year with tho result that the written down value goes down year
after yoat and similarly the depreciation. If, therefore, because there was no
provi,ion under the Income Tax law applying to the former Poduguese territories
providing for depreciation the written down value of an asset is taken as the actual
co't even after many years of its acquisition it would mean putting the assessees
in those territories at an advantage compared to the assessees in th~ rest of India.
More important, it would not accord with realities and would not be in accord·
ance with the scheme of depreciation under the Indian Income-tax Act. A certain
plant and machinery purchased 10 years earlier and now worth half its original
value would be taken to be worth its original cost aoa depreciation allowed on
that basis. It is, therefore, n~y to devise some method by which 'both the
asse55ees in the Indian Territory and the erstwhile Portuguese territory could be
put on the same footing and the normal scheme of depreciation under the Indian
Incom~-tax Act made applicable t.o all. A simila.r problem 8I05e in the case
dealt with in Commissioner of Income Tax, Hyderabad v. Dewan Bahadur lfamgopa/ Mills Ltd. [1961] 2 S.C.R. 318 dealing with assessecs in Hyderabad govern·
ed by the Hyderabad Income True Act before the Indian Income tax Act was
eKtended to the Hyderabad area and the decision given therein is exactly to the
point. [6610-H; 663H]
(2) Jn that case, this Court held that if depreciation actually allowed under
the Hyderabad Income-tax Act alone was taken into account in c;omputing the
aggregate depreciation allOWiJICll and the written down value an anomalous result would follow, namely, depreciatiop allowance to be allowed to the assessee
in the accounting year under the Indian Income Tax Act would be more than
what was allowed in previoos yem under the Hyderabad Income-tax Act, that
thii would create a disparity arid /,.~ azaimt the scheme of the lndJan Income tax
Act, that it was therefore ~
to exJl&jn par&gn.ph 2 of the lt$Oval of Difficullie1 omer. 1950, (comideml to that ca:e) to uaimilate or he.rll!Olli=e the position reprding depreciation &llowuce. Thia is exactly what wu propoxd to .be
dco lu the case ot die tor=r Portup:~ territories by tb llllP\>all3Cl Order.
{6638-H]
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(3) 'fhe decision in Ramgopal Miiis was considered in Straw Prodi;cts Ltd.
v. l.T.O. [1968] 2 SCR !. lt was not di'>sentcd from and by implication the decision in' Ramgopal Mills is still good law. In the Straw Products case the court
held that the. order impugned in that case sought, in purported exercise of the removal of dilllculties power, to r:emove a difficulty which had not arisen and Lhal
therefore it ·was unauthorised. The Court specifically did not think it necessary
to determine. to what extent, if any, it would be open to the Central Government
by an Order issμed in exercise of the power to remove difficulties to make provision which is inC:onsistent with the provisions of the Indian Income tax Act, nor
did it hold that the Order impugned in that case w&S inconsistent with the provision of the Indian income-tax Act. It was therefore open to the Central Government, in exercise of its power~ under cl. 7, to
issue
the impugned order.
[66SB-GJ
( 4) ,Under the scheme of the Indian lncome tax Act, it was open to the assessee to carry forward the depreciation ·for any length of time if he had sustained
any· loss. It could not however, be contended by the assessee in the present case
that it will now be .very difficult, if not impossible, for the assessee to produce
all the accounts of earlier years to show the losses which' he had incurred, the
depreciation be was -entitled to and which he can carry forward.
Assessees are
expected to and would have maintained accounts at least for the purpose of· the
Income-tax Act, ·which was in force in the former Portuguese territories, though
that Act was a simple one. What is necessary for working out the impugned order
is to· know whether there was a profit or a loss and as the cost of acquisition of
the assets, in respect of which depreciation allowance is claimed, should also be
. available it should not be very difficult to calculate the depreciation and arrive
at 'the written down value as on the date when the Indian Income-tax Act was
extended ·io the former Portuguese territories. To accede to the claim of the
assessee lhat the original value of the assets should be taken tci be the written
down value however long they might have been used means that they get an advantage not merely in the first year in which the Indian Income-tax Act was applied to those territories but to enjoy a continued advantage which will last as
Jong as their assets last. [66SG-666C}
(5) The Order is given retrospective effect, but the Central Government has
the power to make an· order or give a direction so as to remove the difficulty
from the very beginning, and that is what the Order does. [666F-G]
Ramgopal Mills Case, followed.
ORIGINAL JURISDICTION : Writ Petitions Nos. 112, 391-394 of 1971
and 330-31 & 382-387 of 1974.
Petitions under Article 32 of the Constitution of India.
A.{(_, Sen (In W.P. No. 112/71), N. A. Palkhiwala (lnW.P. 330331 and 382-387/74), S. P. Mehta, P. C. Bhartari, J. B. Dadachanji,
G. C. Mathur, Arati Mehta and Ravinder Narain, for the petitioners.
F. S. Nariman, Additional Solicitor General, P. P. Rao and s. P.
Nayar, for the respondents ..
The Judgment of the Court was delivered by R. S. Sarkaria, J. A.
Alagiriswami, J. gave a dissenting Opinion.
SARKARIA, J: These writ petitions under Article 3 2 of the Constitution raise a question with regard· to the validity of the 2nd Proviso
to Clause (3) of the Taxation Laws (Extension to Union Ter:!~ories)
(Removal of Difficulties) Order 2 of 1970. The first five petitions of
1971 were urged earlier by Shri Ashok Sen and the rest have been
argued now by Shri N. A. Palkhiwala. They are being disposed of by
a common judgment.
The petitioners are carrying on business in the Union Territories of
Goa, Daman and Diu. Respondents 1 and 2 are the Un1on of India
and the Income-tax Officer, respectively.
644
SUPRl!MB COURT Rl!PORTS
[1975) 2 S.C.R.
Gtia., Daman and Diu are erstwhile PortGgUese territories which · A
became a part of the Union of India on and from December 19, 1961.
Thereupon, the ~res!dent of India in exercise ?f P?Wers under ~cle
240 of the Constitution promulgated the Taxation Laws (Extension to
Union Territories) Regulation III of 1 %3 (for short, the Regulation).
Dy Clause (3) of this Regulation, amongst other laws, the Illdian
Income-t\lJC Act, 1961 (for short, the Act) was extended to the Union
Territory of Ooa, Daman and Diu with effect from April 1, 1963
subject to certain modifications, one of whieh-·was the insertion of s.
294-A in the Act. . Section 294-A gave power to the Central Government to make exemption, reduction or modification · in respec;t of
income-tax to avoid hardship or anomaly or to remove difficulty in .the
application of the Act to oany assessee in the Union Territories of Dadra
Nagar Haveli, Goa, Daman and Diu etc. The power granting the
exemption etc. was exercisable before March 31, 1967. We are not
concerned with the Section because the impugned order was not made
under it.
By Clause ( 4 J of the Reguration, the laws in force in. the Union
Territory corresponding to the Acts specified in the Schedule, stand repealed from April 1, 1963.
Clause (7) provides :
"If any difficulty arises in giving effect in any Union
Territory to the provisions of any Act, or of any rule, notification or order ma4e or issued thereunder, the Central
Government may, by general or sp!!cial order published in
the Offieial Gazette, mak(~ such provisions or give such directions oas appear to it to be expedient or nej:essaryifer the removal of the difficulty.
·
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·1"6n November 8, 1970, the Central Gtivernment t-in purported
exercise of its powers under Clause ( 7) of the Regulation prolijμlgated
the Taxation Laws (Extension to Union Territories)
(Removal of
Difficulties) Order No. 2 of 1970 (hereinafter called the 1970 Order),
the material part of which runs tlhus :
. , :',Whereas certain difficulties have arisen in giving effect
to the.provisions of the foco!lle-t•ax Act, 1961 .. in the Union
Territories of Goa, Daman, Diu .... Now therefore .... the
Central Government hereby makes the following order .. .
(1) ...
(2) It shall be deemed to have come into force on the
1st day of April 1963.
( 3) Computation of aggregate depreciation allowable
and written down· valut>-ln making any assessment under
the Income-tall:. Act, 1961 ( 43 of. 1961) all depreciation
actually allowed under the local laws shall be taken into
account in computing the aggregate of all deductions in res- ·
pect of depreciation referred to iii Clause ( 1) of sub section
(2) of Section 34, and the. written down value under sub
clause (2) of clause (6) o! Section 43 of the said Act.
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645
Provided that where in respect of any asset, depreciation
has been allowed for any year both in the assessment made
under the local Jaw and in the assessment made under the
Income-tax Act, 1885, the greater of the two sums allowed
shall only be taken into aceount,
.
Provided further that where in respect of any period no
depreciation was actually allowed iindcr the local law or the
depreciation actually allowed cannot be ascertained, depreciation in respect of that period shall be calcuklted at the rate
for the time bein$ in force under the Income-tax Act, 1961
or under the. Indian Income-tax Act, 1922, or any Act re-
. pealed by that Act or under any executive orders, issued when
the Indian lncome-tax Act, 1886 was in force, as the case
may be, and the depreciation so calculated shall be deemed
to be the depreeiation actually allowed under the local Jaw."
As clarified by the Explanation, "local law" in relation to the Union
Territory of Goa, Daman and Diu means the Portuguese law relating
to tax on income as in force immediately before April l, 1963. In
these territories, there was in force a Portuguese law relating to levy
of tax, the scheme of which was entirely different from that of the
Indian Income-tax Act. · Under that 1'aw there was no provision for
granting depreciation illlowance; the net profits and gains of the business were not calculated and the tax was levied at a certain per·
centage on· the gross income or turnover of the business, irrespective of
whether the assessee had made profits or suffered losses.
After the extension of the Act to Goa, Daman and Diu, the petitioners were assessed under the Act for several assessment years from
1964-65 onwards. In each of the completed assessments, the assessee
was allowed depreciation of the assets used by him for. his business, on
tha basis of 'written-down value' under cl. (b) of s. 43 ( 6) rQ\d with
s. 32. For the assessment year 1964-65 the "written-down value" was
taken as the actual cost of the assets to the assessee since no depreciatiort was actually allowed to him earlier. In each of the succeeding
annual assessments the 'written-down value' was progressively reduced
by deducting the depreciation actually allowed in the preceding year
from the actual cost of the assets.
In the light of the 2nd Proviso to Clause (3) of the 1970 Order,
the past completed assessments in the. case of these petitioners are
being revised. In consequence, the wri!tten-down value of the . assets
for calculating the depreciation allowance even for the first time when
the petitioners were assessed under the Act, would not be. the actual
cost of the assets to the assessee, but a far lower sum with proportionate increase in the petitioners' liability to tax since the assessment
year 1964-65.
In the case of. petitioners in Writ Petitions 330-331 of .1971, the
Respondent (lncomo-tax Officer)· has already "revised'' the assessment
for the year 1965-66, and reduced the depreciation allowed in view of
the 1970 Order and in the result raised a higher demand. He has,
however, kept that demand in abeyance. till the, decision of these peti-
(14 6
SUPREME COURT REPORTS
[1975] 2 S.C.R.
tions, wherein the validity ()f the 2nd Proviso (hereinafter called the
impugned Proviso) to Clause (3) of the 1970 Order is in question.
Section 2(24) (i) of the Act defines "income" to include "profits
and gains''. Section 28(i) makes the "profits and gains of any business or profession which was carried on by the asscssee at any time
during the previous year" chargeable to income-tax. Section 29 requiros that the income referred to in s. 28 shall be computed in accordance with the provisions including those for deductions contained in
~s. 30 to 43-A. Since the tax is chargeable on "profits and gains" and
not on gross receipts, the profits <o be assessed must be the real profits
computed, subject to the special requirements of the Act in accordance
with the ordinary principles of commercial accounting. It follows that
if the deduction of a particular item from the incomings of the business,
or profession is neither expressly covered by the aforesaid sections, nor
prohibited expressly or by necessary irnplioation by those provisions,
it can be allo'>'(ed under s. 28 (1) provided on ordinary commercial
principles, it is a proper item to be debited against the incomings in
ascertaining the "profits al!d gains" property so-called-see Badridas
Degu v.
Commissioner of Income-tax(I) and Commissio11er of
Income-tax v. Plymaun.(2)
We h•ave alluded to these general principles for a proper perspective. Deducations by way of depreciation allowance, with which we are
directly concerned, have been specifically recognised and dealt with in
s~. 32, 34 and 43 (6) of the Act.
Section 32 adopts two methods in allowing depreciation. In the
case of ocean-going ships depreciation is allowed, year •after year, at
the fixed prescribed percentage on the original cost of the asset to the
assessee s. 32(1 )(8). This has been called. the straight-line method.
In the case of non-ocean going ships and buildings, m1chinery, pla.;t
or furniture, the prescribed percentage of depreciation is to be computed on the basis of written-down value of the asset s. 32(1) (ii). This
is known as the "written-down value" method. Both these methods
seek to ensure that the aggregate of the depreciation allowances granted, year after year, does not exceed hundred per cent of the original
cost of the asset.
Jn the straight-line method, however, the entire de·
preciation is written off sooner than in the 'written-down value' method,
if the figures of actU'al cost of the asset and the prescribed percentage
are the same fn either case.
Sub-·section (2) of s. 32 allows the carry-forward of unabsorbed
depreciation allowance to any subsequent year, without any time-limit,
where such non-absorption is "owing to there being no profits or gains
chargeable for the previous year or owinl( to the profits or gains being
less than the allowance". Pepreciation loss under s. 32(2) (2) thus,
to a large extent, stands on th<~ same footing as other business losses.
An assessee claiming depreciation of assets has to show that such
assets •are owned by him and were used by him in the account year for
the purpose of his business, the profits of which are being charged [s.
-
- ------
(!) 34 T.T.R. 10 (S.C.).
(2) 46 T.T.R. 649 (S.C.).
A
B
c
D
E
F
G
H
A
B
M. u. SINAI V, UNION (Sarkaria, J.)
32(i) ].
Fur~her, the total of all deductions in respect of depreciation
under s. 32(1) .of the Act or under the lnuian Iorome-tax Act 1922
(for short, the 1922 Act) or under any Act repealed by that Act' made
year after year, should not, in any event, exceed the actu•al cost' of the
assets to the assessee s. 34(2) (i).
. The definition of "actual cost" is to be found in s. 43 ( 1) and that
ot "written-down value" in s. 43(6). The later defines it to mean-
( a) in the case of assets acquired in the previous year, the
•actual cost to the asscssce;
(b) in the case of assets acquired before the previous year,
C
the actual cost to the assessee less all depreciation
actually allowed to him under this Act or under. the
I 922 Act or any Act repealed by that Act, or under
any executive Orders issued when the Indian Income-
• tax Act, ,l B86 was in force.
D
E
G
II
( ~mphasis supplie~)
. The pivot of the definition of "wrillten-down value" is the "actual
cost" of the assets. Where the asset was acquired and also used for
the business in the previous year, such value would be its full actual
c~t and depreciation for that year would be allowed at the prescribed
·rutc on .s\lch cost. In subsequent year, depreciation would be calcuJatcd on the basis of actual cost less depreciation actually allowed. The
key word in ·clause (b) is "actually". It is the anti-thesis of that which
js merely speculative, theoretical or imaginary.
"Actually" contra·
indicates a deeming construction of the word "allowed" which it qualifies. The connotation· oi the phrase "actually allowed" is thus limited
to depreciation actually taken into account or granted and given effect
w, i.e. debited by the Income-tax Officer against the incomings of the
business in computing the taxable income of the assessee; it cannot be
stretched to. mean "notionally allowed" or merely allowable on a
notional basis.
·
Of course, any depreciation carried forward under s. 3 2 ( 2) is, in
view of Explanation 3 to s. 43 ( 6) considered as depreciation ''uctually
allowed". But such is not the case here.
From the above conspectus, it .is clear that the essence of the
scheme of the Indian Income-tax Act is, that depreciation is allowed,
year after year, on the actual cost of 'the •assets as reduced by cleprecia·
tion actually pllowed in eaflier years. It follows, therefore, that even
in the case of assets acquired before the previous year, where in the
past no depreciation was computed, actually allowed or carried forward, for no fault of the assessce, the "written-down value" may, under
Clause (b) of s. 43(6), also, be the actual cost of the assets to the
assessce.
6 411
STJPl\l!MB COURT PJ!POl\TS
(1975) 2 S.C.R.
Relying on the ratio of this Court's decision in Straw Products Ltd;
v. Income-tax Officer, Bhopal(il), learned Counsel for the petitioners
have pressed these points into argument :
( 1) The 'arising of a difficulty' in giving effect: to the
Indian Income-tax Act or rules ,tc., made thereunder
is a condition precedent to the invocation of the
power under Clause (7) of the Regulation, and sin<:e
the cxistance of that condition had not been establish·
ed >as an objective fact, the Central Government had
no power to promulgate the impugned Proviso. It is
stressed that th(1 Act has been applied all these years
since its extension in April, 1963 to these Territories
without any difficulty.
(2) The power under Clause (7) of the Regulation can
be exercised only in a mann.er consistent with the
scheme and essential provisions of the Act.
The
impugned provi~o . seeks to amend and change the
scheme and basic provisions of the Act inasmuch as it
provides, inconsistently with ss.43(6) and 32 of the
Act, for dete~ the written-down value on the
basis of a notional depreciation in cases in which no
depreciation was: actually allowed.
(3) In any case, it would be impossible to work the im~
pugned Proviso.
A
B
c
D
Mr. Nariman, learned .Additional Solicitor-General,
submits, in
reply, that difficulties J:.oad arisen in the apPlication of the provisions
E
of the Act in the matter of allowing depreciation to assessccs in these
Union Territories. But for the impugned provisions, it is contended,
such assessees would not have been entitled to claim depreciation
allowance either under clause (a) or under clause (b) of s.43(6) read
with 11.32 of the Act. Clause (a) r.ould not apply to these cases
because the assets were acquired before the year immediately preceding
April 1,1963. Clause (b) \\'.Ould not cover their case because, firstly,
F
under the scheme of the Act, the written-down value of assets acquired
several years earlier cannot be taken as their full actual cost, and,
secondly, the Portuguese law, under which they were formerly assesse.d,
was not repealed by the Indian Income-tax Act, but by the Regulation. It is argued that in s.43 ( 6) read with s.32, there is an implied
prohibition against allowing depreciation on the actual cost of the
assets which were not acquired in the previous year.
This difficulty,
G
says the Counsel, had to be removed to enable the petitioners to claim
just depreciation allowance. If it is assumed-proceeds the argument--
that s. 43 ( 6) is applicable to the case of these assessees and the iiepreciation has to be calculated '1>n the original full cost of the assets
despite their being old and worn out by use over the years; such a
course would be wholly divorced from realities, and give the assessees
in Goa, Dnman and Diu an undue advantage over the asseMCCS in · ff
India~ This resultant disparity, it .is urged, was a ·!lifliculty afld .the ·
(I) [1968] 2 S.C.R. I.
A
B
c
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M. u. SINAI v. UNION (Sarkaria, J.)
649
impugned Proviso removes it by bringing the assessecs in the former
Portuguese Territories at par with the assessees
who had suffered
taxation under the Act.
Learned Counsel further maintains that the decision in Straw Products' case does not advance the case of the petitioners, rather it
supports the Revenue.
In this connection, Counsel has invited our
attention to the observations of this Court at pp. 8 and 13 of the Report in Straw Products' case (supm) to the effect that by the application of the Indian Income-tax Act, 1922, to the merged States "a
difficulty did arise in the matter of determining the depreciation allowance under s. 10(2)(vi)" which corresponds to s.32(1)(ii) of the
1961· Act, and that this "difficulty" was removed by the Taxation Laws
Merged States Removal of Difficulties Order 1949.
It is further contended that once-it was found that such a difficulty
had arisen, the Central Government could, in the legitimate exercise
of its power~ under Clause (7) of the Regulation, exercise of 'the same
by providing that allowances, where they were not actually allowed,
should be deemed to have been allowed for the purpose of depreciation in prior years.
On this point reliance has been placed on Commissioner of Income-tax, Madhya Pradesh v. Straw Products(') and
Commissioner of Income-tax Hyderabad v. Dewan Bahadur Ram
Gopal Mills Ltd.(2).
Since both .sides rely, more or less, on the decision of this Court in
Straw Products Ltd. v. Income-tax Officer, Bhopal (supra) and the
other two authorities cited have a)so been noticed therein, it will be
appropriatB to examine the . same in detail.
T.he assessee therein was a Company formed in 193 7 in Bhopal
State, and was exempted by the Ruler of tl:rat State from payment of
all taxes for. a period of ten years expiring on October 31, 1948. The
State of Bhopal merged with India on August 1, 1949. Tho Taxation
Laws (Extension to Merged States and Amendments) . Act 67 of
1949, which replaced the earlier Ordinance 21 of 1949, extended with
effect from April 1, 1949, to the merged States, amongst other Acts.
the Indian Income-tax Act, 1922 and by s. 7 the laws in force in the
merged States corresponding to the extended Act stood
repealed.
Section 6 contained a "removal of difficulty clause" which was substantially the same as Clause 7 of the Regulation in th.e present case.
Seclion 6 provided :
"If any difficulty arises in giving effect to the provisions
of any Act, rule or order extended by Section 3 to the merged
States, the Central Government inay, by order, make such
provisions or give such directions as appear to it to be .necessary for removal of the difficulty."
:
H
The Central Government in exercise of its power under Clause (8)
of Ordinance 21 of 1949
(which corresponds to Section ·6 of Act
-----
(J) [196412S.C.R.881, 887.
(2) [1961] 2 S.C,R. 318, 325.
650
SUPREME COURT REPORTS
[1975) 2 S.C.R.
•67 o.f 194?) issued the Taxation Laws (Merged States) (Removal · A·
-of Difficulties) Order, 1949, dause(2) of which provided :
"In making any assessment under the Indian
Incomerax Act, 1922, all depreciation actually allowed under any
laws or rules of a merged State relating to inoome-tax and
super-tax, shall be ffiken 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-s.(5) of section 10 of the
said Act.
B
Provided that where in respect of any asset, depredation
has been allowed for any year both in the assessment made
in the merged State and in British India; the greater of the
C
two sums allowed shall only be taken into account."
According to clause ( 2) of the above Order, in computing the
profits and gains of the business carried on by the assessee for determining the tax payable by it for the assessment year 1949-50, depreciation allowed under Section 10(2) (vi) of the 1922 Act was taken as
.a percentage of the original cost to the assessee of the assets used by
D
it for its business, and in the four subsequent years the written down
value of the assets admissible for depreciation was determined on that
basis.
The Income-tax Officer then revised the assessments in respect of the assessment years. 1952-53 and 1953-54 and recomputed its
taxable income on the footing that since the commencement of the
business the assessce must be deemed notionally t-0 have been allowed
depreciation under the Bhopal Income-tax Act.
The Appellate Assis-.
E
tant Commissioner and the Income-tax Appellate Tribull'al disagreed
with the Income•tax Officer and restored the original assessment. On
a reference made by the Appellate Tribunal, the High Cburt held in
favour of the assessee. The Income-tax Commissioner appealed to
this Court.
During the pendency of that appeo.il, the Central Govern·
ment in exercise of its power under s.6 of the Act 67 of 1949 issued
an Order called the Taxation Laws (Merged States) (Removal pf
F
Difficulties) Amendment Order, 1962, adding this Explanation to the
order of 1949 :
"Explanation-For the purpose of this paragraph,
the
expression all depreciation actll'ally allowed under any laws
or rules of a Merged State means and shall .be deemed
always to have meant
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(a) the aggregate allowance for depreciation taken into
·acoount in computing the written down value under any lai>ls
or rules in force in a merged State or carried forward undef
the ·said laws or rules, and
(b) .in cases w.bere income had been exempted from tax
H
under any laws or rules in force in a merged State or under
any assessment with a Ruler the depreciation that would
have been allowed had the income not been so . exempted.
.A
B
c
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[
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.M. u. SINAI v. UNION (Sarkaria, J.)
651
This Court held in Commissioner of lncume-tax, Madhya Pradesh
~·· Straw Products Ltd. (supra) that the expression "actually .allowed"
1~ the Removal of Diffi~ulties Order 1949, meant allowance actu•ally
g1~en -effect t?, but by Vlftue of the Explanation, added by the aforesaid Order of 1962, the correct basis for computing the written down
value of the depreciable assets for lthe relevant period was ·the one.
adopted by the Income-tax Officer.
This Court then declined
to
eX'amine the challenge to the validity of the (Removal of Difficulties)
Ame~~me~t Order, 1962, for the reason that an authority or court
adm1mstenng the Act cannot permit a challenge to be raised against
the rires of the Act.
The assessec thereafter challenged the vires of the 1962 order by
a writ petition filed under Article 226 of the Constitution. The Petition was dismissed and the assessee appealed to this Court on a certificate granted by the High Court. The Court first examined clause
(2) of the Removal of Difficu.ties order of 1949, which corresponds
to the unchallenged part of paragraph (3) of the 1970 Order, and
held it to be va,lid on the groand that since the Income-tax Acts of ·
the merged States had not been repealed by the 1922 Act, a difficult},'
had arisen in taking into account all depreciation actually allowed
under an:y laws or rules of a merged State relating to income-tax for
·the purpose of computing the aggregate depreciation allowance !eferred
to in sub-clause (c) of the Proviso to s. 10(2) (vi) of the 1922 Act,
and that the 1949 order did no more than removing this difficulty.
The Court then proceeded to examine the challenge to the validity
of sub-clause (g) of the Explanation added by the 1962 order. In
this connection, contentions (I) and (2) canvassed in that case were
precisely the &·amc wh.ich have now been raised before us on behalf
of the petitioners. Both these contentions were accepted by the Courf
and, as a result, the aforesaid sub-clauie (b) of the Explanation was,
struck down. · In that context, Shah J.