Jagdish Sahai, J. - (1.) THIS reference under Section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as "the Act"), has been made by the Income-tax Appellate Tribunal, Delhi Bench "A" (hereinafter referred to as "the Tribunal"), at the instance of the assessee, the Raza Sugar Co. Ltd., Rampur (hereinafter referred to as "the assessee"). The reference and the statement of the case relates to the assessment years 1950-51, 1951-52 and 1953-54 to 1956-57. The relevant previous years ended on 31st May of each corresponding year. The assessee is a limited liability company and was incorporated in the erstwhile State of Rampur. It carries on the business of manufacturing sugar. Under an agreement dated May 10, 1933, between the assessee and Rampur State, the income of the assessee was exempted from income-tax for a period of 15 years expiring on December 17, 1948. Under an agreement dated December 14, 1934 the erstwhile State of Rampur had agreed to grant to a separate concern to be constituted by the assessee and the Buland Sugar Company Ltd., leases of agricultural lands with adequate irrigation facilities and suitable for the cultivation of sugarcane as may be required by such separate concern. In order to take advantage of the said agreement, the assessee and the Buland Sugar Company entered into a partnership agreement dated May 5, 1935, to establish a separate concern called the agricultural company. Clause 5 of the partnership agreement dated May 5, 1935, provided that the direction and control of the agricultural company is vested in a committee consisting of two nominees of each partner, subject to the policy and directions of the two partners. Clause 8 of the aforesaid agreement required both the partners to contribute the working funds in equal shares and further provided that "the expenses as well as the profits or losses, if any, shall be allocated between the partners as may be determined from time to time", Clause 12 of the aforesaid agreement provided for reference of disputes between the partners to arbitration. The assessee worked its factory for two shifts throughout the manufacturing season during the years under assessment.
(2.) AFTER the merger of the Rampur State in Uttar Pradesh, the Act was extended to the territories of all the States including that of Rampur by virtue of Section 3 of the Taxation Laws (Extension to Merged States) Ordinance, 1949 (XXI of 1949) (hereinafter referred to as "the Ordinance") promulgated on August 26, 1949. Section 7 of the Ordinance repealed all laws relating to income-tax, super-tax, etc, in force in any of the merged States immediately before the commencement thereof. Section 8 of the Ordinance authorised the Central Government to make such orders and to give such directions as may appear to it to be necessary for removal of difficulties arising in giving effect to the provisions of the Ordinance. In exercise of its powers under Section 8 of the Ordinance, the Central Government passed on December 3, 1349, the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949 (hereinafter referred to as "the 1949 Order"). Paragraph 2 of the 1949 Order reads: "2. Computation of aggregate depreciation allowance and the written down value.--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 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 merged State and in British India, the greater of the two sums allowed shall only be taken into account." On December 31, 1949, the Ordinance was replaced by the Taxation Laws (Extension to Merged States and Amendment) Act, 1949 (hereinafter referred to as "the 1949 Act"). Section 6 of the 1949 Act is identical in terms to Section 8 of the Ordinance.
(3.) ON August 20, 1962, the Central Government in exercise of the powers conferred by Section 6 of the 1949 Act issued the Taxtion Laws (Merged States) (Removal of Difficulties) Order, 1962 (hereinafter referred to as "the 1962 Order"), and added the following Explanation after the proviso to paragraph 2 of the 1949 Order : "Explanation.--For the purpose of this paragraph, the expression ' all depreciation actually allowed under any laws or rules of a merged State , means and shall be deemed always to have meant-- (a) the aggregate allowance for depreciation taken into account in computing the written down value under any laws or rules in force in a merged State or carried forward under the said laws or rules, and (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." The assessee was for the first time assessed under the Act for the assessment year 1949-50. The Income-tax Officer by his letter dated August 23, 1950, informed the assessee : "The dividends declared out of these profits will be taxable but the Government of India have decided that the profits of the company for the period up to December 17, 1948, would be exempt from income-tax which please note." ;