KANTAWALA, J. - (1.) THIS is a reference under S. 66(1) of the Indian IT Act, 1922 (hereinafter referred to as "the Act"), at the instance of the assessee, M/s Dhrangadhra Chemical Works Ltd. The assessee was incorporated in the then Dhrangadhra State of Saurashtra, situated in India. In respect of its business in British India as then constituted it was assessed to income tax under the Act in respect of the income liable to be assessed under S. 4(1)(a) and/or S. 4(1)(c) of the Act, as the case may be, the status for the purpose of assessment being taken as non resident. In computing the total income liable to be so assessed under the Act proportionate allowance used to be made for depreciation of assets under S. 10(2)(vi) of the Act on the basis of the world income to total income as determined in the assessment orders. Such assessments have been made on the assessee for and up to the asst. year 1959 50.
(2.) DHRANGADHRA State became a part of the United States of Kathiawad some time in April, 1948. For the asst. year 1949 50, for which the accounting year ended on March 31, 1949, the assessee was assessed under the Saurashtra Income tax Ordinance, 1949. Written down value of its assets for the purpose of allowing depreciation in the said assessment year was determined under the said Ordinance in accordance with the provisions contained in S. 13(5)(b) thereof. Under S. 13(5) (b) the expression "written down value" was defined as under : "' Written down value 'means, . . . (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actual cost to the assessee less all depreciation actually allowed to him under this Ordinance or allowed under any Act repealed hereby or which would have been allowed to him if the Indian IT Act, 1922, was in force in the past." This Ordinance was promulgated on June 16, 1949, On January 26, 1950, the Constitution of India came into force and the United States of Kathiawad, then known as the United States of Saurashtra, became a Part B State in the Union of India. On March 31, 1950, Finance Act, 1950 (No. 25 of 1950), was enacted. By S. 3 thereof w.e.f. April 1, 1950, the provisions of the Act, i.e., the Indian IT Act, 1922, were made applicable to the whole of the Union of India save and except the State of Jammun and Kashmir. Thus, w.e.f. that date, the Act became applicable to the United States of Saurashtra which was then a Part B State. Sec. 12 of the Finance Act, 1950, provided for removal of difficulties. It is as under : "12. Removal of difficulties. If any difficulty arises is giving effect to the provisions of any of the Acts, Rules or Orders extended by S. 3 or S. 11 to any State or merged territory, the Central Government may by order, make such provision or give such direction as appears to it to be necessary for removing the difficulty." Sec. 13 of the Finance Act, 1950, provided for repeals and under the provisions thereof the Saurashtra Income tax Ordinance, 1949, was repealed. In exercise of the powers conferred, inter alia, by S. 12 of the Finance Act, 1950, by a notification dated December 2, 1950, the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, was made. Under the said Order paragraph 2 thereof provided for computation of aggregate depreciation allowance and the written down value and it is under : "2. Computation of aggregate depreciation allowance and the written down value. In making any assessment under the Indian IT 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 cl. (c) of the proviso to cl. (vi) of Sub S. (2) and the written down value under cl. (b) of sub s. (5) of S. 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." Thus, initially, paragraph 2 did not contain any explanation. By a notification dated March 9, 1953, in exercise of the power conferred by S. 60A of the Act, the following Explanation was added to paragraph 2 in the aforesaid order. "Explanation. For the purposes of this paragraph the expression' all depreciation actually allowed under any laws or rules of a Part B State 'means and shall be deemed to have always meant the aggregate allowance for depreciation taken into acocunt 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."
(3.) THE Hyderabad High Court by its decision reported in S. V. Naik vs. CIT (1956) 29 ITR 206 (Hyd) declared this Explanation made under S. 60A of the Act to be ultra vires. Thereafter, by a notification dated May 8, 1956, in exercise of the powers conferred by S. 12 of the Finance Act, 1950, the Central Government made an amendment in paragraph 2 of the Taxation Laws (Part B States ) (Removal of Difficulties) Order, 1950, by inserting the following Explanation : "Explanation. For the purpose of this paragraph, the expression' all depreciation actually allowed under any laws or rules of a Part B State 'menas 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." The wording of this Explanation was identical. Later on by a notification dated August 20, 1962, in exercise of the power conferred by S. 12 of the Finance Act, 1950, the Explanation in paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, was substituted by the following Explanation : "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 (a) The aggregate allowance for depreciation taken into account in computing the written down value under any laws or rules in force in a Part B 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 Part B State or under any agreement with a Ruler, the depreciation that would have been allowed had the income not been so exempted." ;