http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 9  

PETITIONER: COMMISSIONER OF INCOME-TAX, MADHYA PRADESH ETC.

       Vs.

RESPONDENT: M/S.  STRAW PRODUCTS LTD., BHOPAL

DATE OF JUDGMENT: 03/12/1965

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

CITATION:  1966 AIR 1113            1966 SCR  (2) 881  CITATOR INFO :  R          1966 SC1117  (5)  OPN        1967 SC1552  (6)  R          1968 SC 579  (1,11,12)  E          1969 SC  78  (18)  RF         1973 SC2117  (5)  R          1975 SC 797  (30,35)

ACT: Taxation Laws (Merged States Removal of Difficulties) Order, 1949 Paragraph 2 as amended by Taxation Laws (Merged States) (Removal     of     Difficulties)     (Amendment)      Order 1962--Explanation  added  to Paragraph  2--Meaning  of  term "depreciation  actually allowed" retrospectively amended  by Explanation--Effect and validity of 1962 Order.

HEADNOTE: The   respondent  company,  incorporated  in  1939  in   the erstwhile  State of Bhopal, was exempted under an  agreement with the Ruler from taxation under the Bhopal Income-tax Act for  a period of ten years which ended on October 31,  1948. After the merger of the State with India in 1949 the company became liable to assessment under the Indian Income-tax Act, 1922.   The  Taxation  Laws  (Merged  States)  (Removal   of Difficulties)  Order, 1949 provided in Paragraph 2  that  in computing depreciation allowance all depreciation  "actually allowed"  under the relevant law of a merged State shall  be taken  into account.  Accordingly the Income-tax Officer  in making assessments for the years 1952-53 and 1953-54 on  the respondent company allowed depreciation on the original cost of  the assets.  However on the decision of the Bombay  High Court  in Dharangdhara Chemical Works Ltd.  (IT.   Reference No.  60  of  1956) coming to his notice  he  recomputed  the depreciation  allowable to The company for the,  said  years 4952-53 and 1953-54 by taking into account the  depreciation that would have been allowed to the company under the Bhopal Income-tax  Act  if  it  had  not  been  exempted  from  the ’assessment under the said Act.  The order of the Income-tax Officer was reversed by the Appellate Assistant Commissioner who  held  that depreciation which had  never  been  allowed could  not  be taken into consideration.   The  Tribunal  in appeal, and the High Court in reference took the same  view.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 9  

Subsequent  to the High Court’s judgment the  Taxation  Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962 was passed which added an Explanation to Paragraph 2 of the  1949  Order By this Explanation it was  said  that  the expression "all depreciation actually allowed under any laws or rule& of a merged State" meant and shall be deemed always to  have meant that in cases where income had been  exempted from tax under any laws or rules in force in a merged  State or  under any agreement with a Ruler, the depreciation  that Would have been allowed had the income not been so exempted. In  appeal to this Court against the High  Court’s  judgment the Revenue contended : (1) The expression ’actually allowed under  any  laws or rules of a merged  State’  occurring  in paragraph  2 of the 1949 Order meant depreciation  allowable under the provisions of the said laws or rules. (2) The 1962 Order  which explained the expression ’actually allowed’  to mean  the depreciation that would have been allowed had  the income  not  been exempted by the  Ruler  was  retrospective because  it contained the words ’shall be deemed  always  to have meant’, and in view of this Explanation the  Income-tax Offier’s order was right.  Because the 882 1962  Order came up for consideration for the first time  in this  Court  the respondent was allowed to challenge  it  on various grounds. HELD  :  (i) The High Court was right in its view  that  the expression   actually   allowed’  in  the  1949   Order   is unambiguous  and  connotes the idea that the  allowance  was actually given effect to. [887 E] (ii)The   Explanation  added  by  the  1962  Order   however retrospectively  changed  the  meaning  of  the   expression ’actually  allowed’ and the Revenue was entitled to rely  on it.   Applying  the 1962 Order to the facts of  the  present case  it was clear that the correct basis for computing  the written  down  value  of  the  depreciable  assets  for  the relevant  period  was  the one  adopted  by  the  Income-tax Officer. [890G] (iii)The  1962  Order could be taken into  consideration  by this  Court although it was not in existence when  the  High Court  answered the reference. The question referred to  the High  Court  was  of  sufficient  amplitude  to  include   a discussion  of  the amendments made retrospectively  in  the Taxation  Laws  (Merged States)  (Removal  of  Difficulties) Order, 1949.[890 F] Commissioner  of  Sales-tax,  U.P.  v.  Bijli  Cotton  Mills Hathras,  [1964]  7  S.C.R.  383;  A.I.R.  1964  S.C.  1594, applied. (iv)The  respondent  could  not  be  allowed  to  raise  the question  whether the 1962 Order was ultra vires because  of the, decision of this Court in Venkataraman’s case. [889 A] K.   S.  Venkataraman  v. State of Madras, [1966]  2  S.C.R. 229. (v)The  respondent could not claim that the 1962  Order  did not  apply  to  it on the ground that  no  income-tax  being payable  by it, it was not an assessee.  The  definition  of ’assessee’ must mean a person by whom income-tax is  payable under the Bhopal Act.  If it had not been for the  agreement with the Ruler the respondent would have been liable to  pay tax. [889 H] (vi)There  was no force in the respondent’s contention  that the  1962 Order was not retrospective and did not  apply  to assessments  made before it came into force.  The  terms  of the  Order are plain and if it is deemed as directed by  the Order, that the expression ’actually allowed under the  laws or rules of a merged State’ should have the meaning ascribed

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 9  

to it by the Explanation, as from December 3, 1949, when the Taxation  Laws  (Merged States). (Removal  of  Difficulties) Order,  1949 came into force, the Explanation must apply  to the assessments for the years 1952-53 and 1943-54. [890 B-C]

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  893  and 894 of 1964. Appeals  by special leave from the judgment and order  dated the  August  22, 1961 of the Madhya Pradesh  High  Court  in Misc.  Civil Case No. 304 of 1960. A.V. Viswanatha Sastri, N. D. Karkhanis, B. R. G. K. Achar and R.N. Sachthey, for the appellant. S.T. Desai, Mahinder Narain, Rameshwar Nath, S. N. Andley and P.L. Vohra, for the respondent.                             883 The Judgment of the Court was delivered by Sikri,  J.  These  appeals by  special  leave  are  directed against the judgment of the High Court of Madhya Pradesh  in a reference made to it by the Income Tax Appellate Tribunal, under  S.  66(1)  of  the  Indian  Income  Tax  Act,   1929, hereinafter  referred to as the Act.  The Tribunal  referred the following question to the High Court :               "Whether, on the facts of the case and  having               regard to the provisions of paragraph 2 of the               Taxation  Laws  (Merged  States)  (Removal  of               Difficulties) Order, 1949, and clause 8 of the               Agreement   made  on  20th  September,   1938,               between the assessee and the State of  Bhopal,               the  correct basis for computing  the  written               down value of the depreciable assets as at  1-               11-1948  is  the one which is adopted  by  the               Income  Tax Officer or the one adopted by  the               Appellate Assistant Commissioner?" The  relevant  facts are these.  The respondent,  M/s  Straw Products Ltd., Bhopal, hereinafter called the assessee, is a public   limited  company.   It  was  incorporated  in   the erstwhile  State  of  Bhopal  in  1939  and  was  given  the certificate of commencement of business on May 30, 1939.  On September  20, 1938, the assessee entered into an  agreement with  the  Government of Bhopal.  Under  the  agreement  the assessee  obtained certain concessions and facilities.   The assessee not only got exclusive licence to manufacture card- board  articles of all kinds but also got land on  lease  on favourable  terms.   It was also exempted  from  payment  of customs  and  other  duties  payable  to  the  municipality. Clause  8  of the agreement is relevant for the  purpose  of these appeals and is in the following terms:               "8.  Subject to and so far as the State  shall               not become or become obliged by any Instrument               of Accession or Supplementary Instrument under               the Government of India Act, 1935, in  respect               of  any Federal Taxation, it is hereby  agreed               as follows:-               (a)During  the  period of I 0 years  from  the               date on which the said Company takes over  the               land  for  its  business  purposes  the   said               Company shall not be liable to pay any sum  by               way of taxation to the State. It  is common ground that this agreement was acted upon  and for a period of 10 years the assessee was not called upon to submit  any returns of income and no assessment was made  on the  assessee under the Bhopal Income Tax Act.  This  period

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 9  

of ten 884 years  expired  on  October 31, 1948.  On  August  1,  1949, Bhopal  merged  in  India  and  was  formed  into  a   Chief Commissioner’s Province. For  the assessment year 1949-50, the assessee was  assessed under  the Indian Income Tax Act, 1922, on the total  income of the period November 1, 1948 to December 12, 1948, as  the assessee  made  up its accounts on the  31st  December  each year.   For  the assessment years 1952-53 and  1953-54,  the assessment  years  which  are the  subject  matter  of  this reference  (previous  years Calendar years  1951  and  1952, respectively),  the  Income  Tax Officer,  by  orders  dated November   27,   1952  and  September  30,   1953,   allowed depreciation  on the machinery, buildings and  other  assets owned  by  the assessee on the basis of the  original  cost, i.e., the cost paid in 1939.  Subsequently noticing a report in the Times of India, dated March 15, 1957, giving the view taken  by the Bombay High Court in the case of  Dhrangadhara Chemical Works Limited(1), the Income Tax Officer  initiated action  under  S. 34(1) of the Act in respect of  these  two assessment years.  In the Dhrangadhara Chemical Works(1) case the  Bombay High Court had held that the written down  value on  the  opening  day  of  the  account  period  for   which assessment  is  to be made under the Indian Income  Tax  Act should  be taken at the actual cost, less  the  depreciation which  could have been claimed under the Indian  Income  Tax Act,  1922.   After hearing the  assessees  objections,  the Income  Tax Officer by his order dated March 4,  1958,  held that  "the written down value of the assets of  the  company will have to be redetermined as on 1-1-1951.  This would  be done  by first determining the written down value of  assets as  on 1-11-1948 under the Bhopal Income Tax Act.  From  the written   down  values  so  ascertained,  all   depreciation actually allowed till 31-12-1950 would be deducted.  The net figures thus arrived at would show the written down value of the assets in the beginning of the assessment year 1952-53." Consequently,  the depreciation of Rs. 2,71,961  allowed  in the  original  assessment  for 1952-53 was  reduced  to  Rs. 1,29,883  and for the assessment year 1953-54  the  original depreciation  allowance of Rs. 2,87,285 was reduced  to  Rs. 1,72,673. The  Appellate Assistant Commissioner, disagreeing with  the Income Tax Officer, held on appeal that the assessee had not been  allowed  excess  depreciation  allowance  as  per  the original  assessment and there was no basis  for  initiating proceedings  under  s.  34.  He was of the  view.  that  the expression "actually allowed" could (1)  Income  Tax Reference No. 60 of 1956;  judgement  dated February 14, 1957.                             885 not imply depreciation allowed by a mental phenomenon.   The Appellate  Tribunal  upheld  the  order  of  the   Appellate Assistant  Commissioner and directed the computation of  the allowance  on that basis.  On a reference the High Court  by its judgment dated August 22, 1961, answered the question as follows :               "In the circumstances of this case the correct               basis  for  computing written  down  value  of               depreciable  assets of the company is the  one               adopted    by    the    Appellate    Assistant               Commissioner." On  August 20, 1962, in exercise of the powers conferred  by s.  6 of the Taxation Laws (Extension to Merged  States  and Amendment) Act, 1949 (LXVII of 1949) the Central  Government

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 9  

made the following order to amend the Taxation Laws  (Merged States)  (Removal of Difficulties) Order, 1949.   The  order was  called  the Taxation Laws (Merged States)  (Removal  of Difficulties) (Amendment) Order, 1962 (hereinafter  referred to  as the 1962 Order).  The relevant part of part 2  is  in the following terms : .lm15 "  2.  In  the Taxation Laws  (Merged  States)  (Removal  of Difficulties) Order, 1949, after the proviso to paragraph 2, the following Explanation shall be inserted, namely: the  "Explanation.-For   the  purpose  of  this   paragraph, expression ’all depreciation actually allowed tinder any  laws or rules of a Merged State’ means and shall be deemed always to have meant(a)........ (b)in  cases where income had been exempted from  tax  under any  laws or rules in force in a Merged State or  under  any agreement  with  a Ruler, the depreciation that  would  have been allowed had the income not been so exempted." Paragraph 2 of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, reads as follows :               "2.  Computation  of  aggregate   depreciation               allowance and the written-down value.-               In  making  any assessment  under  the  Indian               Incometax Act, 1922, all depreciation actually               allowed  under any laws or rules of  a  merged               State  relating  to incometax  and  super-tax,               shall  be taken into account in computing  the               aggregate depreciation allowance referred to               886               in  sub-clause  (c) of the proviso  to  clause               (vi)  of subsection (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  merged               State and in British India, the greater of the               two  sums  allowed shall only  be  taken  into               account." This  order was made in exercise of the powers conferred  by :S.  8  of  Taxation  Laws  (Extension  to  Merged   States) Ordinance, 1949 (XXI of 1949).  The Ordinance, which applied to Bhopal, by S. 3(1) extended inter alia the Indian  Income Tax  Act, 1922, and all rules and orders made thereunder  to all the merged States, and by S. 3 (2) the Indian Income Tax Act,  1922  and the rules and orders  made  thereunder  were extended  and brought in force in all the merged  States  on April  1,  1949.   Section 8 of the  Ordinance  provided  as follows :               "If any difficulty arises in giving effect  to               the provisions of this Ordinance, the  Central               Government may by order make such  provisions,               or give such directions, as appear to it to be               necessary for removal of the difficulty." The  Taxation Laws Amendment (Second) Ordinance,  1949  (No. XXXIII  of 1949) inter alia made various amendments  in  the Indian Income Tax Act, 1922. These Ordinances were replaced by the Taxation Laws  (Exten- sion  to  Merged States and Amendment) Act, 1949  (LXVII  of 1949).   Section  3 of this Act is similar to s.  3  of  the First Ordinance.  Section 6, which took the place of S. 8 of the First Ordinance, reads as follows:               "If any difficulty arises in giving effect  to               the  provisions  of  any Act,  rule  or  order               extended  by section 3 to the  merged  States,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 9  

             the  Central  Government may, by  order,  make               such  provision  or give  such  directions  as               appear  to it to be necessary for  removal  of               the difficulty." Section  34  repealed Ordinance XXI of  1949  and  Ordinance XXXIII  of  1949, but by sub-s (2) inter  alia  provides  as follows               " ... anything done or any action taken in the               exercise of any power conferred by any of  the               Ordinances  referred to in this section  shall               for  all purposes be deemed to have been  done               or taken in the exercise of                                    887               the  powers conferred by this Act as  if  this               Act  were  in force on the day on  which  such               thing was done or action was taken." Mr.  A.  V. Viswanatha Sastri, the learned counsel  for  the Revenue,  urges before us that the High Court was  wrong  in answering the question in favour of the assessee.  He  urges that  the  expression "actually allowed under  any  laws  or rules of a merged State" occurring in para 2 of the Taxation Laws (Merged States) (Removal of Difficulties) Order,  1949, meant  allowable  under the provisions of the said  laws  or rules.   He  says  that  if the income  of  an  assessee  is exempted  from taxation for a certain number of  years,  the assessee  must  be deemed to have claimed  depreciation  and deemed  to have been allowed depreciation according  to  the provisions  of the said laws or rules.  He further  says  it does  not  matter whether the assessee made a claim  or  not because  it is fair that when the Indian Income Tax  Act  is applied  the  assessee  should be brought at  par  with  the assessees who had suffered taxation under the Act. We  are  unable to give such an artificial  meaning  to  the expression "all depreciation actually allowed under any laws or  rules",  and  we  agree with the  High  Court  that  the expression  "actually allowed" is unambiguous  and  connotes the  idea that the allowance was actually given  effect  to. If  it was intended to include any allowances which are  not actually  allowed  then the Central  Government  would  have added  a  deeming provision as the Legislature  did  in  the Explanation to s. 10(5) of the Act. In  the  alternative, he relies on the 1962  Order  set  out above.  He says that the order has explained the  expression "actually allowed" to mean the depreciation that would  have been  allowed  had  the income not been  exempted  under  an agreement with a Ruler.  He further says that this order  is retrospective because it expressly says that the  expression "all  depreciation actually allowed under any laws or  rules of a merged State shall be deemed always to have meant." Mr.  Desai, the learned counsel for the respondent,  objects to  this  order  being relied on by Mr.  Sastri  on  various grounds.   He further says that on a true interpretation  of the  order  it does not apply to the case of  the  assessee. The  question  then arises whether we are entitled  to  take into consideration the 1962 order.  The learned counsel  had cited various cases and has argued that this being an Appeal by  special leave from a reference, we should not  take  the order into consideration.  It is unnecessary to refer to the cases because the point is concluded by a judgment of this 8Sup C 1166-10 888 Court  in  Commissioner of Sales Tax, U.P. v.  Bijli  Cotton Mills,  Hathras(1).   Shah,  J.,  speaking  for  the   Court observed as follows:               "Undoubtedly  the  Tribunal  called  upon   to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 9  

             decide   a  taxing  dispute  must  apply   the               relevant   law  applicable  to  a   particular               transaction to which the problem relates,  and               that law normally is the law applicable as  on               the  date on which the transaction in  dispute               has  taken  place.   If  the  law  which   the               Tribunal  seeks  to apply to  the  dispute  is               amended,  so as to make the law applicable  to               the transaction in dispute, it would be  bound               to decide the question in the light of the law               so amended.  Similarly, when the question  has               been  referred  to the High Court and  in  the               meanwhile  the  law  has  been  amended   with               retrospective operation, it would be the  duty               of the High Court to apply the law so  amended               if  it applies.  By taking notice of  the  law               which  has been substituted for  the  original               provision, the High Court is giving effect  to               legislative intent and does no more than  what               must  be deemed to be necessarily implicit  in               the   question  referred  by   the   Tribunal,               provided  the question is couched in terms  of               sufficient amplitude to cover an enquiry  into               the question in the light of the amended  law,               and   the   enquiry   does   not   necessitate               investigation of fresh facts.  If the question               is not so couched as to invite the High  Court               to  decide the question in the light,  of  the               law   as   amended  or  if   it   necessitates               investigation  of  facts which have  not  been               investigated,  the  High Court may  refuse  to               answer  the  question.   Application  of   the               relevant  law  to  a  problem  raised  by  the               reference   before  the  High  Court  is   not               normally  excluded merely because at the  date               when  the  Tribunal decided the  question  the               relevant  law was not or could not be  brought               to its notice." Therefore,  following this judgment, we must hold  that  Mr. Sastri  is entitled to rely on the 1962 order and it is  our duty  to  answer  the  reference  in  accordance  with   the amendment made by the order, unless the question referred is not  couched in terms of ,sufficient amplitude to  cover  an enquiry into the question in the light of the amended law. Mr. Desai then raises two questions in respect of the order. First  he says that it is the first time that the  order  is being  relied on in these proceedings and he is entitled  to urge before us that (1)  [1964]7 S.C.R. 383.  A.I.R. 1964 S.C. 1594.                             889 the  order  is  bad.  He has given a number  of  reasons  in support  of his plea that the order is ultra vires,  but  in view of the decision of this Court in K. S. Venkataraman  v. State of Madras(1), we refused to allow him to develop  these objections.   We  may mention that he seeks  to  distinguish Venkataraman’s(1) case on the ground that the Supreme  Court and  the High Court are not creatures of the order which  he was impugning.  He further says that the Appellate  Tribunal would also have been entitled to go into the question of the validity  because  the order is not part of the  Income  Tax Act,  and it is not the creature of the order in  the  sense mentioned  in  Venkataraman’s(1) case.  We are not  able  to sustain the distinction sought to be made by Mr. Desai.  The order is in effect an amendment of the Indian Income Tax Act insofar as it is applicable to the merged States.  If it had

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 9  

not  been for the order, only the provisions of s. 10(5)  of the  Act would have been applied for the purpose of  working out depreciation.  Now, in view of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, as  explained by the 1962 order, a different rule has been directed to  be applied  and the Income Tax Officer is bound to follow  this statutory direction.  We are unable to see how the  judgment in Venkataraman’s case does not apply. Mr. Desai then contends that the 1962 order did not apply to this  case  because  income of the  assessee  had  not  been exempted  under the agreement with the ruler.  He says  that the  words "exempted from tax" in the 1962 order  mean  that the  assessee  must  have been liable to pay  tax  and  then exemption granted.  He points to the definition of the  word "assessee"  in  the  Bhopal Income Tax Act,  1936  (VIII  of 1936),  which has been defined as "a person by  whom  income tax is payable." Then he refers to the charging section  the relevant part of which reads as follows :               "3.  Whereby a notification in the jarida  the               Government  declares that income-tax shall  be               charged  for  any year at any  rate  or  rates               applicable to the total income of an assessee,               tax .... " He  says  that the respondent was not  an  assessee  because under the agreement no income tax was payable by it and  for this reason no notice or assessment had been made under  the Bhopal  Income  Tax  Act.  We are  unable  to  sustain  this contention.  The definition of ’assessee’ must mean a person by  whom income tax is payable under the Bhopal Act.  If  it had not been for the agree- (1)  [1966] 2 S.C.R. 229. 890 ment,  the respondent would have been liable to pay tax  and it is the agreement alone which exempted it from taxation. Mr.  Desai  then  contends  that  the  1962  order  is   not retrospective and does not apply to assessments made  before the  order  came  into  force.  We  see  no  force  in  this contention  because the terms of the order are plain and  if it is deemed, as directed by the order, that the  expression "actually allowed under any laws or rules of a merged State" should  have the meaning ascribed to it by the  Explanation, as  from  December 3, 1949, when the Taxation  Laws  (Merged States)  (Removal  of Difficulties) Order, 1949,  came  into force, the Explanation must apply to the assessments for the year 1952-53 and 1953-54. Lastly, Mr. Desai contends that the question referred to the High  Court  in  this  case  is  not  couched  in  terms  of sufficient  amplitude  to cover the points he has  tried  to make,  namely, whether the order dated August 22,  1962,  is retrospective  and  whether the assessee is covered  by  the terms  of  cl.  (b)  of the  Explanation.   Looking  at  the question  it seems to us that the substance of the  question which  was referred was whether the view held by the  Income Tax  Officer  or the Appellate  Assistant  Commissioner  was right,  and  the words "having regard to" occurring  in  the question  did  not have the effect of restricting  the  laws that could be considered for answering the question.  It may also  be  said that when paragraph 2 of  the  Taxation  Laws (Merged  States) (Removal of Difficulties) Order,  1949,  is referred  to,  it  would  include  paragraph  2  as  amended retrospectively.   We must, therefore, overrule Mr.  Desai’s objection and hold that the question framed by the Appellate Tribunal  is  wide  enough to include a  discussion  of  the amendments made retrospectively in the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 9  

In conclusion, applying the 1962 order to the facts of  this ,case  it is clear that the answer to the question  referred must  be  that the correct basis for computing  the  written down value of the depreciable assets as on November 1, 1948, is the one which was adopted by the Income Tax Officer.   In the  result, the appeals are accepted, the judgment  of  the High Court set aside and the question answered as  indicated above.   In the circumstances of the ,case the parties  will bear their own costs. Appeals allowed. 891