M.C.DESAI C.J. - (1.) THIS is a statement of a case referred under section 66(1) of the Income-tax Act of 1922 at the instance of an assessee inviting this courts answer to the following question : "Whether on a true interpretation of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, and sub-clause (b) of clause (5) of section 10 of the Indian Income-tax Act, the written down value of the assets of the assessee-company for the purpose of calculation of depreciation would be the book value of the assets worked out by the assessee or the original cost of the assets ?"
(2.) THE controversy is about the depreciation to be allowed to the assessee when determining its profits and gains from the business of manufacturing alcohol and other spirits for the assessment years 1950-51, 1951-52, 1952-53 and 1953-54. THE assessee is a company incorporated in the erstwhile Rampur State in 1943. Income-tax was introduced in Rampur State with effect from May 1, 1944, but on May 2, 1944, an agreement was entered into between the assessee and the Ruler of Rampur State under which the assessee was exempted from payment of all State taxes. Rampur State territory merged in India some time before April 1, 1949. On August 26, 1949, the Taxation Laws (Extension to Merged States) Ordinance No. XXI of 1949 was promulgated. Section 3 of it extended to all merged States the Indian Income-tax Act with all Rules and orders made thereunder with effect from April 1, 1949. With effect from the assessment year 1949-50 the territory became "taxable territory" within the meaning of the Indian Income-tax Act of 1922, by virtue of section 3 of the Finance Act, 1950. Under section 60A (reference to sections will henceforth be to the Income-tax Act, 1922, except where the contrary is indicated), the Central Government exempted the assessees income for the period ending on April 30, 1949, from payment of the tax. THE result was that the assessee became liable to pay income-tax under the Indian Income-tax Act with effect from the assessment year 1950-51 and the income from May 1, 1949, to March 31, 1950, was assessable in the assessment year 1950-51. Section 10(2) lays down that the profits and gains of business, profession or vocation in respect of which a tax is to be paid by the person carrying on the business, profession, etc., are to be computed after making certain allowances. One of the allowances mentioned is "(vi) in respect of depreciation of.... buildings, machinery, plant or furniture" ("used for the purposes of the business, profession or vocation") "being the property of assessee, a sum equivalent, where the assets are ships other than ships ordinarily plying on inland waters, to such percentage on the original cost thereof to the assessee as many in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed." This is subject to the proviso that where in the assessment of the assessee full effect cannot be given to any such allowance in any year owing to there being no profits or gains chargeable for that year or owing to the profits or gains chargeable being less than the allowance, then the allowance or part of the allowance to which effect has not been given shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance. "Written down value" is explained in section 10(5) to mean "(a) in the case of assets acquired in the previous year, the actual cost to the assessee.... (b) in the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Act, or any Act repealed thereby...." Section 8 of the Ordinance of 1949 empowered the Central Government to make by order "such provisions, or to give such directions, as appear to it to be necessary for removal of the difficulty" that might arise in giving effect to its provisions, and in exercise of this power the Central Government on December 3, 1949, made the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949. Section 2 of it was as follows : "In making any assessment under the Indian Income-tax Act, 1922, all depreciation actually allowed under any laws or rules of a merged State relating to income-tax and super-tax shall be take 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." The 1949 Ordinance was replaced by the Taxation Laws (Extension to Merged States and Amendment) Act No. 67 of 1949. By section 3 it applied the Indian Income-tax Act along with all Rules and orders made under it to all merged States with effect from April 1, 1949. Section 6 contained a provision for removal of any difficulty arising in giving effect to the provisions of the Income-tax Act or Rules or orders made thereunder to the merged States. Section 34(1) repealed the 1949 Ordinance and section 34(2) laid down that notwithstanding this repeal "anything done or any action taken in the exercise of any power conferred by it shall for all purposes be deemed to have been done or taken in the exercise of 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." The assessment order against the assessee for the assessment year April 1, 1950, to March 31, 1951, was made on December 1, 1953. The assessment orders for the next three years were made on subsequent dates. In these assessment proceedings the question arose of the depreciation to be allowed to the assessee under section 10(2) (vi) in respect of the buildings, machinery, plant and furniture used in the business by the assessee during the accounting years relevant to the assessment years. In the return for the assessment year 1950-51 submitted by it, it claimed depreciation of its assets under section 10(2) (vi) at the prescribed percentage on their written down value calculated by it after deducting depreciation at the prescribed percentage, year after year, since their purchase, as if section 10(2) (vi) had been applicable, and had been applied, since the assessment year 1943-44. The assets were originally purchased on 1942-43, relevant to the assessment year 1943-44. No income-tax was in force in 1943-44 at all. The Rampur State Income-tax Act came into force on May 1, 1944, but the assessee was exempted and, therefore, it was not liable to be assessed even under it. The Indian Income-tax Act became applicable to the assessee on April, 1949, but for the month of April, 1949, it was exempted from the liability. So up to May 1, 1949, it was not governed by the Income-tax Act and, consequently, there was no question whatsoever of its being entitled to deduct from the profits the amount of depreciation. But in order to calculate its profits for its shareholders purposes it arrived at the profits every year after deducting from the gross profits the depreciation in the value of the assets. The result was that in its accounts of every year it used to note down progressively deceasing written down values of the assets and, in its return for the assessment year 1950-51, it claimed depreciation at the prescribed percentage on the written down value of the assets noted in its accounts of the year 1949-50. When the return was taken into consideration by the Income-tax Officer it claimed that it should be allowed depreciation on the original cost of the assets reduced by depreciations actually allowed to it under the Rampur Income-tax Act and the Indian Income-tax Act in the previous assessment years, i.e., on the original cost, since no depreciation had been allowed to it under either of the Acts previously for the reasons already given and not on the written down values noted in its accounts of 1949-50. The Income-tax Officer rejected its claim on the ground that it amounted to claiming allowances admissible under section 10(2) (vi) in respect of past years and allowed it depreciation on the written down values. On appeal the Appellate Assistant Commissioner reversed the Income-tax Officers order holding that "no depreciation had been actually allowed to the appellant. The words actually allowed mean that which has been in fact allowed by the assessing authority, as opposed to that which could have been allowed or allowable under an Act.... the written down value in this case would be the cost price of the original assets". On an appeal by the Income-tax Officer, the Income-tax Appellate Tribunal restored the Income-tax Officers assessment order. It held as follows : "The assets not having been acquired in the previous year, the Income-tax Officer could not take the cost price of such assets as the written down value.... the Income-tax Officer treated the assessees assets as having been acquired in the previous year since the assessee became liable to Indian income-tax for the first time in respect of the previous year.... There is no provision in the Income-tax Act to cover a case like this. All that could have been done and which appears reasonable is the procedure adopted by the Income-tax Officer."
(3.) ASSESSMENT orders for the succeeding assessment years 1951-52, 1952-53 and 1953-54 were passed by the Income-tax Officer as well as by the Tribunal on the basis of the assessment order for the assessment year 1950-51; depreciations were allowed in these years on the written down values calculated after deducting the depreciations allowed in the earlier year. The written down value of an asset in the accounting year 1949-50 reduced by the depreciation allowed on it in the assessment year 1950-51 and so on. Then at the instance of the assessee the Tribunal referred the case to this court. The question formulated by the Tribunal is very improper. As framed, it is so simple that no answer other than one in the words of the definition of "written down value" in section 10(5) can be given. The written down value must vary from year to year and one answer to the question as formulated cannot be given, so as to be applicable in all the four years. Even when the original cost is the written down value it can be the written down value in only one year and in the succeeding years it must be less. The Tribunal should not, therefore, have formulated a question the answer to which does not depend upon the assessment year or the accounting year. The question assumes that under section 10(5) only two alternative courses are possible and that one course or the other is applicable in every circumstance. One of the alternative courses referred to in section 10(5) is different from the one stated in the question. If the words of the section 10(5) are not applicable to the facts of the instant case the answer to the question would be of only academic interest. Lastly, the emphasis on "true interpretation" of the 1949 Removal of Difficulties Order is misplaced. Its interpretation does not pose any problem and the difficulties that have arisen in this case have not arisen on account of the language used in it. Under section 10(5) (b) the written down value is to be calculated after deducting all depreciation actually allowed under the Indian Income-tax Act and the sole purpose behind the 1949 Removal of Difficulties Order was to be substitute in section 10(5) (b) for the words "under this Act" the words "under this Act or under a Merged State Income-tax Act". The question that arises here is whether the written down value should be calculated after deducting the depreciation, even though it was not actually allowed to the assessee on account of its being exempted from income-tax and it arises from the words used in section 10(5) and not from any words used in the 1949 Removal of Difficulties Order. I would proceed to answer the question as if it were : "Whether the written down value of the assets of the assessee for the purpose of calculation of depreciation allowance under section 10(2) (vi) for the assessment year 1950-51 is the original cost of the assets or the original cost less all depreciation that would have been allowed to it under the Indian Income-tax Act and the Rampur State Income-tax Act if it had not been exempted from income-tax by the Central Government and the Ruler of Rampur State." ;