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PETITIONER: COMMISSIONER OF INCOME-TAX, MADHYA PRADESH

       Vs.

RESPONDENT: M/S.  NANDLAL BHANDARI MILLS LTD.

DATE OF JUDGMENT: 07/12/1965

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

CITATION:  1966 AIR 1026            1966 SCR  (2) 925  CITATOR INFO :  F          1967 SC 455  (10)

ACT: 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.

HEADNOTE: 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 within ss. 4(1) (a) and 4(1)(c) read with s.  42 of  the Act.  Depreciation had been allowed to it under  the Indore  Industrial  Rules as well 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  Difficulties) Order,  1950 which laid down in the proviso to  paragraph  2 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."  The Income-tax  Officer found that up to and including the  year 1944  the  sum  allowed as  depreciation  under  the  Indian Income-tax Act was larger and therefore 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 period 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 the full amount  of this  depreciation  allowed against the total  world  income

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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 assessment.  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  Difficulties Order.   The  Income-tax Officer,  the  Appellate  Assistant Commissioner and the Appellate Tribunal having rejected this plea  the matter went in reference to the High Court.   That Court  took  the view contended for by the  respondent  viz. that only the proportionate amount of depreciation which was attributable  to  the  taxable 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 business,   that  the  allowance  did  not  depend  on   the assessable  income, and that the High Court, therefore  went wrong in striking a proportion on the basis of a part of the income 926 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. HELD   :  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  some,times the  procedure laid down in the Act for  imposing  liability upon the tax-payer.  The proviso used the 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 "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 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  actually allowed under the Income-tax Act  for the  years  up  to and including 1944  must  depend  on  the provisions of that Act. [932 B] (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 down 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 cost to  the  assessee less all depreciation actually allowed to him under the Act. The  allowance  towards depreciation is conditioned  an  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

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original  cost of the assets to ascertain the  written  down value.   De hors such an allowance., it has no  significance in income-tax law. [932 F-H;933    A-B] (iv) During the years up to and including 1944 the  assessee was taxed as a nonresident on the income which fell under s. 4(1)(a) or unders.  4(1)(c),  read with s. 42 of the  Indian Income-tax  Act.  The assessee was only assessed during  the said  years  in respect 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 contract-,  were signed in British India.  Such  income  was brought  to tax in terms of r. 33 of the  Indian  Income-tax Rules,  1922.   The method adopted was that  the  amount  of income  for the purpose of Indian Income-tax was  calculated on  an  amount which bore the same proportion to  the  total profits of the business as the receipts accruing or  arising in  India bore to the total receipts, of the  business.   By applying  the  formula in r. 33 the Income-tax  Officer  had actually  allowed  only  a fraction of  the  amount  towards depreciation allowable in assessing the world income of  the assessee.   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 terms of r. 33 does not amount to an actual allowance of the entire depreciation in ascertaining the tax- 927 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] Hakumchand  Mills Ltd. v. Commissioner of  Income  (Central) 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 Subs.  (2) have to be computed.  One of such  allowances  is depreciation  in respect of the assets used for the  purpose of  business.  But depreciation determined according to  the rules 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-D]

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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 assuming  that only  a  fraction of the depreciation is  actually  allowed. Depreciation  is deducted only once and for 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 depreciation allowed is a fraction of the total depreciation of the business. [942 H]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 629 to  632 of 1964. Appeals  from  the  order dated September 22,  1961  of  the Madhya  Pradesh High Court in Misc.  Civil Case No.  277  of 1960. A.   V.  Viswanatha Sastri, R. Ganapathy Iyer, B. R.  G.  K. Achar and R. N. Sachthey, for the appellant. 928 S.   T. Desai, T. A. Ramachandran, J. B. Dadachanji, for the respondent. The  Judgment Of SUBBA RAO and SIKRI, JJ. was  delivered  by SUBBA RAO, J. SHAH J. delivered a dissenting opinion. Subba Rao, J. These appeals raise the question of  construc- tion of the provisions of the Taxation Laws (Part B  States) (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  incorpo- rated  in Indore under the Indore Companies Act,  1914.   It 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, 1950, 1951 and 1952.  In the course  of the  assessments  it  became  necessary  to  ascertain   the written-down 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 resident 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  contracts were  accepted in British India was brought to  tax.   After the  Indian  Income-tax Act was extended to  Indore,  diffi- culties   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, in order to rationalize the  tax

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structure,  the Central Government in exercise of the  power conferred on it under s. 12 of the Finance Act, 1950, issued the  Order  where under 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 depreciation  allowances for the years up to  and  including 1944 as computed under the Indian Income-tax Act, 1922,  and for the                             929 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  Income-tax  Officer. At  the instance of the assessee, the  following  questions, among  others,  were referred to the High  Court  of  Madhya Pradesh, Jabalpur:               (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 Difficulties)               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 in Commissioner of Income-tax, Hyderabad v. Dewan Bahadur  Ramgopal  Mills  Ltd.(1). The  correctness  of  the answers  given  by the High Court in respect  of  these  two questions  is  not  questioned  before  us  and,  therefore, nothing further need be said about them here. Questions 1 and 4, in substance, form two parts of the  same question.   On  question  1, the High Court  held  that  the depreciation allowed for the years up to and including  1944 in the (1)  [1962] 2 S.C.R. 318: [1961] 41 I.T.R. 280. 930 assessments  made  in the taxable territories would  be  the depreciation 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 in regard to questions 1 and 4 referred to it. Mr.  A. V. Viswanatha Sastri, learned counsel for the  Reve-

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nue,   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 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 on 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. 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 only that part of the depreciation  which had  entered into the computation 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. 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  In-               come-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               refer-               931               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 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 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  depreciation   allowances actually  allowed  under the laws obtaining in  the  Part  B

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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 the section defines  the expression "all depreciation  actually  allowed under  any  laws  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  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  some- times "the computation of income"; sometimes, the determina- tion  of  the  amount of tax  payable;  and  sometimes,  the procedure  laid down in the Act for imposing liability  upon the  taxpayer.  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 word bears under the Act.  For the purpose of computing  the 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  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.  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  Income  tax  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 original cost  thereof to  the  assessee as may in any case or class  of  cases  be prescribed and in any other cases, to such percentage 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 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 allowance is  in respect of such assets as are used in the business and shall be calculated on the written-down 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

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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 accounting year  and  thus contributing to the earning of  the  income. Though it is not unrelated to the profits, it does not 933 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, 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 (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 respect 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  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 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 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, 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/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. 51represents the depreciation of the assets  used in the business and 934 if  this is allowed, the total income will be Rs. 95/-;  and one  fourth  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. 51-, 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

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the gross income accrued in India to a non-resident; Rs. 51- is  the value of the depreciation on the total  assets.   By taking one-fourth of Rs. 51-, i.e., Rs. 1.25, we get at  the figure of Rs. 23.75, that is to say, only one-fourth of  the amount representing depreciation is allowed in  ascertaining the  taxable  income in India.  It is,  therefore,  manifest that  the Income-tax Officer, who applied the  formula  laid down  in r. 33 of the Income-tax 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 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. 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 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. Whatever  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, 1922, no depreciation was allowed at all in ascertaining the taxable  income  in  India, for that  was  only  taken  into consideration in arriving at the total world income. 935 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 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  Court  in  Hakumchand Mills Ltd.  v.  Commissioner  of Income-tax  (Central),  Bombay(1).   We  endorse  the   view expressed therein. In the result, we hold that the High Court has given correct answers  to questions 1 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 Com- pany  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

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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  for assessment under the Indian Income-tax  Act for the assessment years 1950-51, 1951-52, 1952-53 and 1953- 54, the Income-tax 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 depreciation allowed under  the Indore  Industrial  Tax  Rules, and  assessed  tax  on  that footing.  The order of the Income-tax (1) [1963]47 I.T.R. 949. Sup.  CI./66 13 936 Officer   was   confirmed   by   the   Appellate   Assistant Commissioner 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 Court Commissioner of Income-tax v. Dewan Bahadur  Ram- gopal Mills(1) did not require consideration, and the  other was not canvassed.  The two other questions are : .lm15 "  (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  depreciation ’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 the total income and not  the  depreciation computed  against the total world income, and on the  fourth question  that  the depreciation  ’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  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 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 that year, or (ii) if its  income arising in the taxable territories

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(1)  [1962] 2 S.C.R. 318 :41 I.T.R. 280                             937 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  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 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 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 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 promulgated read  as follows :               "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 shalt only  be               taken into account."  938 But the expression "all depreciation actually allowed  under any  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(1).  ’thereafter, the Central Government issued an amendment to the Order in exercise of the powers under s. 12 of  the Finance Act, 1950, and incorporated  an  Explanation with retrospective operation.  The Explanation which  became effective from May 8, 1956, provided :               "For  the  purpose  of  this  paragraph,   the               expression "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

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             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." 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’ 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  to be applied, and depreciation actually allowed  under the  State  law  had to be compared  with  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  the  Part B State" in the  proviso  have  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 written down value, which in  the  first year is the actual cost to the (1) 20 I.T.R,206- 939 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  on  S.  10(5)  (b)  was  in   terms inapplicable,  and depreciation had to be  calculated  under the   special  machinery  prescribed  by  ’the  proviso   to paragraph 2 of the Taxation Laws (Part B States) Removal  of Difficulties)  Order, 1950, when assessment  of  income  had been made both under the State law and the Indian income-tax Act, 1922. 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  depreciation which is availed of for the  purpose  of assessment  of tax, and not merely a fraction of  the  total depreciation allowance taken into account in levying  charge upon  a part of the taxable income at a rate  determined  by the  total world income.  That is stated in paragraph 10  of the judgment of the Tribunal :               "The  last contention of the assessee is  that               the  Income-tax Officer should not have  taken               the  full  depreciation  availed  of  in   the               preceding  years,  but that  the  depreciation               should  be apportioned in the same  manner  as               the   income  brought  to   assessment.    The               deduction  should only be made in  respect  of               that  depreciation  which  can  reasonably  be               attributable  to the Indian income.  We  think               that the law does not make any distinction  as               to  the  part of income which was  brought  to               assessment  under the Indian  Income-tax  Act.

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             If depreciation has in fact been availed of by               the  assessee either under the Indian  Income-               tax  Act or under the Industrial Rules of  the               State deduction has to be made." The  High Court did not accept this view.  They observed  in paragraph-8 of their judgment               ".......the  depreciation  in  respect  of  an               asset  under the Indian Income-tax  Act  would               clearly  be the ’one actually allowed as  laid               down   in   Section  10  (5)   (b)   and   the               depreciation  under  the Part  B  State’s  law               would  also  be the one  actually  allowed  as               provided in the substantive part of  paragraph               2.  It  follows,  therefore,  that  under  the               proviso it is the greater of the two               940               depreciation allowances actually allowed  that               has to be taken into account in computing  the               written  down value under section  10(5)  (b).               The  word "allowed" used in the  proviso  thus               takes  its  colour from  the  expression  "all               depreciation  actually  allowed to  him  under               this Act" as used in Section 10(5) (b) and the               words "all depreciation actually allowed under               any  laws or rules of a Part B State" used  in               paragraph   2.   The   "Appellate    Assistant               Commissioner  and  the Tribunal  adopted  this               construction of the word "allowed" as used  in               the proviso; but inconsistently with this they               held  that the words "in the assessment  made"               used in the proviso indicated that it was  the               greater  of  the  depreciation  not   actually               allowed  but  taken into account  against  the               total  world income that was to be taken  into               account  in computing the  written-down  value               under  section  10(5)(b) after 1950.   We  are               unable  to agree with this view.  The  proviso               has  to be read with the substantive  part  of               paragraph  2  and  section  10(5)(b)  and   is               concerned only with laying down the rule  that               the greater of the two depreciation allowances               shall be taken into account." 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 sub-s. (2) have to be computed. One  of  such  allowances  is  depreciation  in  respect  of buildings, machinery, plant and furniture being the property of the assessee and used for the purpose of the business, at such percentage on the original cost thereof to the assessee or such percentage on the written-down value thereof as  may in any case or class of cases be prescribed.  The view which has  appealed  to  the High Court is  that  even  though  in determining  the  rate  at which Lax was to  be  charged  in respect of the income of the company as resident (subject to the  deductions permissible under s. 14(2) (c) or as a  non- resident, the entire depreciation at rates applicable  under the  Indian  Income-tax Act had to be  taken  into  account, depreciation  allowed in the taxable territories within  the meaning of the proviso meant only the fraction of the  total amount of depreciation calculated in determining the income, equal  to  the fraction which the income taxable  under  the Indian  Income-tax  Act  bore to the  total  income  of  the Company.  But depreciation determined according to the rules merely  enters  into  the computation  of  taxable  profits, whether the assessee is a

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941 resident or a non-resident.  In the assessment of a  Company the same rates of tax apply under the Indian 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 by s. 14 (2) (c) : if it is non-resident only  a  slice  of  that income  would  be  chargeable.   In determining the chargeable income from business,  profession or vocation and the rate applicable thereto, the same  rules apply,   whether  the  Company  is  taxed  as  resident   or nonresident.   Under  the  scheme  of  the  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,  for reasons  already  mentioned, be taxable.  But  total  profit being determined after depreciation is allowed, between  the taxable  profits-which  may  be  a  fraction  of  the  total profits-and  depreciation  there is no  definable  relations 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 only a fraction of the depreciation considered for computing total profit. The  view which prevailed with the Tribunal that  in  deter- mining  the depreciation allowed within the meaning  of  the proviso,  it is wholly immaterial that a part of  the  total income  was chargeable to tax "if depreciation has  in  fact been availed of by the assessee", is in my judgment correct. Reliance  was sought to be placed upon r. 33 of  the  Indian Income-tax  Rules, by counsel for the Company in support  of his plea.  The material part of the Rule is :               "In  any case in which the Income-tax  Officer               is  of opinion that the, actual amount of  the               income,  profits or gains accruing or  arising               to  any  person residing out  of  the  taxable               territories whether directly or indirectly....               in  the  taxable territories......  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  profits  of               the business of such               942               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." The  rule in terms applies only when the Income-tax  Officer cannot  ascertain  the  actual  income,  profits  or   gains accruing  or  arising  to any person  residing  outside  the taxable territories.  Where from the evidence actual  income can  be determined the rule has no application.   Again  the rule  contemplates  the  computation of  income  of  a  non- resident in three different ways : (1) on such percentage of the  turnover  so  accruing or  arising  as  the  Income-tax Officer  may  consider to be reasonable; (2)  on  an  amount which bears the same proportion to the total profits of  the

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business  of  such  person as the receipts  so  accruing  or arising  bear  to the total receipts of the  business  (such profit  being computed in accordance with the provisions  of the Indian Income-tax Act); and (3) in such other manner  as the Income-tax Officer may deem suitable. In the computation of income of a non-resident by the second method it may be necessary to determine and allow  deprecia- tion.   When the first or the third method is  resorted  to, determination  of  depreciation  would normally  be  out  of place, because by the first method the income is taken as  a percentage  of the turnover accruing or arising, and by  the third method taxable income may be determined in such  other manner as the Income-tax Officer deems suitable.   Paragraph 2  of  the  Taxation  Laws  (Part  B  States)  (Removal   of Difficulties) Order, 1950, applies only to cases in which in making  an  assessment  under  the  Indian  Income-tax   Act depreciation  allowed  has  to  be  taken  into  account  in computing  the total profits or income.  Where the  question of  considering  the depreciation allowed  does  not  arise, because in the method adopted determination of  depreciation does  not  enter,  paragraph 2 of necessity  would  have  no application.  What must, however, be noticed is that in  the ascertainment  of total profits, either for the purposes  of assessment  in  the ordinary manner when the income  of  the assessee  is  determinable,  or where a fraction  is  to  be adopted for the purpose of the second method contemplated by r.  33, there is no scope for assuming that only a  fraction of  the depreciation is actually allowed.   Depreciation  is deducted once and for all, and it is deducted in determining the total profits of the business.                             943 There is therefore no warrant either in s. 10(2) (vi) or  in paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties)  Order,  1950, or in r. 33  framed  under  the Indian  Income-tax  Act,  for  the  view  that  depreciation allowed  is  a  fraction of the total  depreciation  of  the business.   I am unable to agree with the view taken by  the High Court that in determining the appropriate  written-down value,  by  the  application of the rule  contained  in  the proviso to paragraph 2, only a fraction of the  depreciation allowed in assessments made under the Indian Income-tax Act, should be taken into account. I record an answer on the first question in the affirmative, and  on the fourth question that the  depreciation  actually allowed  means  the  depreciation  taken  into  account   in arriving at the total or world income.                            ORDER In accordance with the opinion of the majority, the  appeals are dismissed with costs. 944