http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 4  

PETITIONER: COMMISSIONER OF INCOME-TAX, BOMBAY

       Vs.

RESPONDENT: DHARAMPUR LEATHER CLOTH CO.  LTD., BOMBAY

DATE OF JUDGMENT: 03/12/1965

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C.

CITATION:  1966 AIR 1117            1966 SCR  (2) 859  CITATOR INFO :  F          1968 SC 579  (12)

ACT: Indian   Income-tax  Act,  1922   s.   10(5)(b)-Depreciation ’actually allowed’-Whether includes depreciation that  might have been allowed if income had not been exempted. Taxation  Laws  (Merged States)  (Removal  of  Difficulties) (Amendment) Order, 1962--Company exempted by Ruler of Indian State from, taxation-After merger exemption given under para 15  of  Merged  States (Taxation  Concession)  Order,  1949- Exemption  by  Commissioner whether a  continuation  of  the argeement with the Ruler.

HEADNOTE: The respondent company obtained under an agreement with  the Ruler of the erstwhile State of Dharampur an exemption  from levy  of income-tax and super-tax for the first seven  years of  its  working. it commenced business in  June  1949.   In August 1949 the State of Dharampur merged with the  Province of Bombay.  The company then applied for and obtained  under para  15 of the Merged States (Taxation  Concession)  Order, 1949,  an exemption from income-tax and supper-tax for  five years  commencing from April, 1950.  In the assessment  year 1956-57 when the company was to be assessed under the Indian Incometax Act, 1922, for the first time, it claimed that  as no depreciation had actually been allowed to it earlier  the original  cost of its machinery etc. should be taken as  the written  down  value  for the  purpose  of  calculating  the allowable   depreciation.   The  assessing   and   appellate authorities held against the company but the High Court held in  its favour.  In appeal to this Court by the  Revenue  it was  contended  that (1) on a proper  interpretation  of  s. 10(5)(b) of the Indian Income-tax Act, 1922 the depreciation must be deemed to, have been allowed to the assessee in  the years  in  which  its  income  was  exempted  and  (2)   the concession given by the Commissioner must be deemed to be  a continuation  of the agreement with the Ruler and  therefore the Taxation Laws (Merged States) (Removal of  difficulties) Order  1949 as amended by the Taxation Laws (Merged  States) (Removal  of Difficulties) (Amendment Order,), 1962  applied to the facts of the case.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 4  

HELD:  (i) The words ’actually allowed’ in s.  10(5)(b)  did not  include any notional allowance and the High  Court  had rightly decided that the original cost was the written  down value. [862 C] Commissioner  of Income-tax, Madhya Pradesh v.  M/s.   Straw Products Limited, Bhopal, [1966] S.C.R. applied. (ii) The exemption granted to the company under para. 15  of the  Merged States (Taxation Concession) Order, 1949 was  an exemption  under s. 60A of the Income-tax Act and not  under any agreement.  The case of the assessee had therefore to be determined  with  reference  to  s.  10(5)(b)  of  the   Act unaffected by the amendment made by the 1962 Order. [862 G]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 956 of 1964. 860 Appeal  by special leave from the judgment and  order  dated October  7,  9,  1961  of the  Bombay  High  Court  in  I.T. Reference No. 6 of 1960. A.   V.  Viswanatha Sastri, Gopal Singh, B. R. G. K. A  char and R.    N. Sachthey, for the appellant. Mahinder Narain, Rameshwar Nath, S. N. Andley and P. L. Vohra, for the respondent. The Judgment of the Court was delivered by Sikri,  J. This appeal by special leave is directed  against the  judgment  of  the High Court of  Judicature  at  Bombay answering the following question against the appellant :               "Whether  depreciation  is  allowable  on  the               original cost of the various components of the               Plant  and Machinery and other assets  of  the               company as acquired and used prior to 1-7-1953               ?" The  relevant  facts are these.  We are concerned  with  the assessment year 1955-56 (accounting year being April 1, 1954 to  March  31,  1955).  The  respondent,  Dharampur  Leather Company  Ltd.,  Bombay,  hereinafter  referred  to  as   the assessee  company, was incorporated on June 15, 1943,  as  a private limited company, and later on November 24, 1949,  it became  a  public limited company.  On August 1,  1949,  the Dharampur State merged with the Province of Bombay.   Before its incorporation, the promoters of the assessee company had negotiated with the Ruler of Dharampur and secured from  the Ruler  total exemption from the State Income Tax of  profits of  the  company  for  a period  of  seven  years  from  the commencement of its working.  The factory commenced  working from  June 15, 1949.  After the merger the assessee  company applied  to the Commissioner of Income Tax, Bombay,  by  its letter dated June 22, 1951, for relief under para 15 of  the Merged States (Taxation Concessions) Order, 1949.  The  Com- missioner  of  Income Tax communicated the decision  of  the Government in his letter dated March 8, 1952, to exempt  the company  from income tax and super tax for a period of  five years  with  effect from April 1, 1950.   It  was,  however, stated that the shareholders of the company would be  liable to pay tax on the amount of dividend received by them. The  Merged States (Taxation Concessions) Order,  1949,  was issued  by the Central Government in exercise of the  powers conferred  by  S. 60A of the Indian Income  Tax  Act,  1922, hereinafter                             861 referred  to as the Act, and s. 23A of the Business  Profits Tax  Act,  1947.   Para 15 of the  said  order  provides  as follows :

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 4  

             "15(1)   Where  any   industrial   undertaking               situate  in a merged State claims that it  has               been granted any exemption from or  concession               in respect of income-=, super-tax or  business               profits  tax by the Ruler of the State  before               the  1st day of August, 1949, it shall  submit               an application to the Commissioner of  Income-               tax giving the following particulars :-               1.    Name of the Industrial undertaking.               2.    Status  (i.e. whether public or  private               company,               firm, individual or Hindu undivided family).               3.    Nature of business.               4.    Date of commencement of the business.               5.    Nature of the concessions granted.               6.    Period for which concessions granted.               7.    Unexpired period of the concessions from               the 1st day               of August, 1949.               (2)   The application shall be accompanied  by               a copy of the orders of the State granting the               concession or of the agreement with the State.               (3)   The Commissioner shall, after  obtaining               such  other  information as  he  may  require,               forward   the  application  to   the   Central               Government  which,  having regard to  all  the               circumstances  of  the case,  may  grant  such               relief, if any, as it thinks appropriate." The assessee company contended before the Income Tax Officer in the course of the assessment proceedings for the  assess- ment year 1955-56 that this being the first assessment  year after it commenced working as a factory, no depreciation had in fact been actually allowed to the assessee in any earlier assessment year, and, therefore, the depreciation should  be computed on the original cost of the various items of  plant and  machinery and other assets of the company.  The  Income Tax Officer, however, rejected this contention and held that depreciation must be computed on the written-down values  of machinery computed as if the income of the assessee had been worked  out  properly  in the years  when  the  company  was exempted  and  the depreciation being allowed at  the  usual rates.   The assessee failed before the Appellate  Assistant Commissioner  and  the Appellate  Tribunal.   The  Appellate Tribunal  held  that  the words  "actually  allowed"  in  s. 10(5)(b) 862 of  the  Act  were  wide enough to cover  the  case  of  the assessee.   The  High Court, however, held that  if  in  the prior  years no depreciation had been actually allowed  then the  actual cost incurred by the assessee for acquiring  the machinery would be the written down value of the machinery. Mr.  Sastri,  the learned counsel for the  appellant,  first urges  that on a proper interpretation of S. 10 (5)  (b)  of the  Act,  the  depreciation must be  deemed  to  have  been allowed to the assessee in the years in which the income  of the  assessee company was ,exempted.  There is no  force  in this  contention.   We  have  delivered  judgment  today  in Commissioner  of Income Tax, Madhya Pradesh v. Messrs  Straw Products Limited Bhopal(1) and held that the words  "actually allowed"  in  para 2 of the Taxation  Laws  (Merged  States) (Removal  of Difficulties) Order, 1949, did not include  any notional  allowance.   Following  that  judgment,  we   must interpret the words ’actually allowed’ occurring in s. 10(5) (b) of the Act in the same manner. Mr.  Sastri  next contends that the  Taxation  Laws  (Merged

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 4  

States) (Removal of Difficulties) Order, 1949, as amended by the Taxation Laws (Merged States) (Removal of  Difficulties) (Amendment)  Order,  1962, hereinafter referred to  as  1962 Order,  applies to the facts of the case.  He says that  the exemption  was ,originally given by the Ruler  of  Dharampur State  under an agreement with the assessee company and  the concession by the Commissioner of Income Tax vide his letter dated  March  8,  1952, was in fact  a  continuance  of  the agreement,  and therefore, this exemption must be deemed  to have been granted under an agreement with the Ruler,  within the meaning of 1962 Order.  We are unable to accede to  this contention.   In  our opinion, the Explanation  inserted  by 1962  Order has no bearing on the facts of this ,case.   The exemption granted by the Central Government is granted under para  15 of the Merged States (Taxation Concessions)  Order, 1949, which was itself issued under s. 60A of the Act.   The result  is that the exemption was granted under the Act  and not  under any agreement.  The case of the assessee must  be determined  with  reference  to s. 10 (5) (b)  of  the  Act, unaffected by the amendment made by the 1962 Order. In  the result we agree with the High Court that the  answer to  the question referred to should be in  the  affirmative. The :appeal fails and is dismissed with costs. Appeal dismissed. (1)  [1966] 2 S.C.R. 881. 863