TMI Blog1974 (11) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... 31 and 382-387 of 1974. The question that arises in all these petitions is the constitutional validity of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order 2 of 1970, issued under clause 7 of the Taxation Laws (Extension to Union Territories) Regulation, 1963, by which the Indian Income-tax Act was extended, with certain amendments, to the Union Territories of Goa, Daman and Diu with effect from April 1, 1963. Clause 7 of that Regulation, which is relevant for our purposes, reads as follows: "7. If any difficulty arises in giving effect in any Union Territory to the provisions of any Act, or of any rule, notification or order made or issued thereunder, the Central Government may, by general or special order published in the Official Gazette, make such provisions or give such directions as appear to it to be expedient or necessary for the removal of the difficulty." Under the law in force in the former Portuguese territories of Goa, Daman and Diu income-tax was levied at a certain percentage of the gross receipts of an assessee. No allowance in the nature of depreciation was permitted in computing the gross income. Under clause (ii) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1961, becomes applicable to that territory should be related to realities and not be wholly unrelated to them or notional. The provision regarding written down value and allowance of depreciation under the Indian income-tax law proceeds on the basis of depreciation allowed year by year with the result that the written down value goes down year after year and similarly the depreciation, as was pointed out by this court in Ramgopal Mills Ltd.'s case in the following words: "The basic and normal scheme of depreciation under the Indian Income-tax Act is that it decreases every year, being a percentage of the written down value which in the first year is the actual cost and in succeeding years actual cost less all depreciation actually allowed under the Income-tax Act, or any Act repealed thereby, etc." If, therefore, because there was no provision under the income-tax law applying to the former Portuguese territories providing for depreciation the written down value of an asset is taken as the actual cost even after many years of its acquisition it would mean putting the assessee in those territories at an advantage compared to the assessees in the rest of India. More important ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On this basis the written down value of the asset at the end of the first year after the Hyderabad Income-tax Act came into force would be Rs. 65.61, at the end of the second year Rs. 59 (more or less), at the end of the third year Rs. 53.10, that is, when the Indian Income-tax Act was extended to the Hyderabad area. When the Indian Income-tax Act was extended to Hyderabad area a Difficulties Removal Order was first issued in these terms in 1950: "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 Part B State relating to income-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." Taking advantage of the presence of the words "all depreciation actually allowed" in this Order the assessee argued that only the depreciation allowed after the Hyderabad Income-tax Act came into force should be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly allowed under the Hyderabad Income-tax Act was taken into account in computing the aggregate depreciation allowance and the written down value, an anomalous result would follow as in the present case, namely, depreciation allowance to be allowed to the assessee in the accounting year under the Indian Income-tax Act would be more than what was allowed in previous years under the Hyderabad Income-tax Act. This would create a disparity and be against the scheme of the Indian Income-tax Act. It was, therefore, necessary to explain paragraph 2 of the Removal of Difficulties Order, 1950, to assimilate or harmonise the position regarding depreciation allowance, and the Explanation added in 1953 or 1956 was obviously intended to remove the difficulty arising out of that disparity or disharmony." In effect, it means in terms of the example which we have given earlier that instead of the written down value being taken to be Rs. 53.10 when the Indian Income-tax Act was extended to Hyderabad the assessee wanted Rs. 80.20 to be taken as the written down value and that was why this court pointed out that the depreciation allowed to the assessee in the accounting year under the Indian Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Section 6 of Act 67 of 1949 authorises the Central Government to make provisions or to give directions as may appear to be necessary for removal of difficulties which had arisen in giving effect to the provisions of any Act, rule or order extended by section 3 to the merged States. By the application of the Indian Income-tax Act to the merged States a difficulty did arise in the matter of determining the depreciation allowance under section 10(2)(vi). That difficulty was removed by the enactment of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949. Even by that Order all depreciation actually allowed under any laws or rules of a merged State relating to income-tax was to be taken into account in computing the aggregate depreciation allowance. Thereafter, there survived no difficulty in giving effect to the provisions of the Indian Income-tax Act or the rules or orders extended by section 3 to the merged States. To sum up: the power conferred by section 6 of Act 67 of 1949 is a power to remove a difficulty which arises in the application of the Income-tax Act to the merged States it can be exercised in the manner consistent with the scheme and essential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o and would have maintained accounts at least for the purpose of the Income-tax Act which was in force in the former Portuguese territories, though that Act was a simple one and not as complex as the Indian Income-tax Act. What is necessary for working out the impugned order is to know whether there was a profit or a loss and as the cost of acquisition of the assets, in respect of which depreciation allowance is claimed, should also be available, it should not be very difficult to calculate the depreciation and arrive at the written down value as on the date when the Indian Income-tax Act was extended to the former Portuguese territories. To accede to the claim of the assessees that the original value of the assets should be taken down to be the written down value, however long they might have been used, means that they get an advantage not merely in the first year in which the Indian Income-tax Act was applied to those territories. It is a continued advantage which will last as long as these assets last. In terms of the example we have given earlier in the first year instead of the 10 per cent. out of the written down value of Rs. 53.10, that is, Rs. 5.30, being allowed as the dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (for short, the Act) was extended to the Union Territory of Goa, Daman and Diu with effect from April 1, 1963, subject to certain modifications, one of which was the insertion of section 294A in the Act. Section 294A gave power to the Central Government to make exemption, reduction or modification in respect of income-tax to avoid hardship or anomaly or to remove difficulty in the application of the Act to any assessee in the Union Territories of Dadra, Nagar Haveli, Goa, Daman and Diu, etc. The power granting the exemption, etc., was exercisable before March 31, 1967. We are not concerned with the section because the impugned order was not made under it. By clause (4) of the Regulation, the laws in force in the Union Territory corresponding to the Acts specified in the Schedule, stand repealed from April 1, 1963. Clause 7 provides: "If any difficulty arises in giving effect in any Union Territory to the Provisions of any Act, or of any rule, notification or order made or issued thereunder, the Central Government may, by general or special order published in the official Gazette, make such provisions or give such directions as appear to it to be expedient or necessary f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uese law relating to levy of tax, the scheme of which was entirely different from that of the Indian Income-tax Act. Under that law there was no provision for granting depreciation allowance; the net profits and gains of the business were not calculated and the tax was levied at a certain percentage on the gross income or turnover of the business, irrespective of whether the assessee had made profits or suffered losses. After the extension of the Act to Goa, Daman and Diu, the petitioners were assessed under the Act for several assessment years from 1964-65 onwards. In each of the completed assessments, the assessee was allowed depreciation of the assets used by him for his business, on the basis of "written-down value" under clause (b) of section 43(6) read with section 32. For the assessment year 1964-65, the "written-down value" was taken as the actual cost of the assets to the assessee since no depreciation was actually allowed to him earlier. In each of the succeeding annual assessments the "written-down value" was progressively reduced by deducting the depreciation actually allowed in the preceding year from the actual cost of the assets. In the light of the second prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 34 and 43(6) of the Act. Section 32 adopts two methods in allowing depreciation. In the case of ocean-going ships depreciation is allowed, year after year, at the fixed prescribed percentage on the original cost of the asset to the assessee [section 32(1)(i)]. This has been called the straight-line method. In the case of non-ocean going ships and buildings, machinery, plant or furniture, the prescribed percentage of depreciation is to be computed on the basis of written-down value of the asset [section 32(1)(ii)]. This is known as the "written-down value" method. Both these methods seek to ensure that the aggregate of the depreciation allowances granted, year after year, does not exceed hundred per cent, of the original cost of the asset. In the straight-line method, however, the entire depreciation is written off sooner than in the "written-down value" method, if the figures of actual cost of the asset and the prescribed percentage are the same in either case. Sub-section (2) of section 32 allows the carry forward of unabsorbed depreciation allowance to any subsequent year, without any time-limit, where such non-absorption is "owing to there being no profits or gains charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of Explanation 3 to section 43(6), considered as depreciation "actually allowed". But such is not the case here. From the above conspectus, it is clear that the essence of the scheme of the Indian Income-tax Act is that depreciation is allowed, year after year, on the actual cost of the assets as reduced by the depreciation actually allowed in earlier years. It follows, therefore, that even in the case of assets acquired before the previous year, where in the past no depreciation was computed, actually allowed or carried forward, for no fault of the assessee, the "written-down value" may, under clause (b) of section 43(6), also, be the actual cost of the assets to the assessee. Relying on the ratio of this court's decision in Straw Products Ltd. v. Income-tax Officer, Bhopal, learned counsel for the petitioners have pressed these points into argument: (1) The "arising of a difficulty" in giving effect to the Indian Income-tax Act or Rules, etc., made thereunder is a condition precedent to the invocation of the power under clause (7) of the Regulation, and since the existence of that condition had not been established as an objective fact, the Central Government had n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned proviso removes it by bringing the assessees in the former Portuguese Territories at par with the assessees who had suffered taxation under the Act. Learned counsel further maintains that the decision in Straw Products' case does not advance the case of the petitioners, rather it supports the revenue. In this connection, counsel has invited our attention to the observations of this court at pages 8 and 13 of the report in Straw Products' case to the effect that by the application of the Indian Income-tax Act, 1922, to the merged States "a difficulty did arise in the matter of determining the depreciation allowance under section 10(2)(vi)" which corresponds to section 32(1)(ii) of the 1961 Act, and that this "difficulty" was removed by the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949. It is further contended that once it was found that such a difficulty had arisen, the Central Government could, in the legitimate exercise of its powers under clause (7) of the Regulation, remove the same by providing that allowances, where they were not actually allowed, should be deemed to have been allowed for the purpose of depreciation in prior years. On this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in computing the profits and gains of the business carried on by the assessee for determining the tax payable by it for the assessment year 1949-50, depreciation allowed under section 10(2)(vi) of the 1922 Act was taken as a percentage of the original cost to the assessee of the assets used by it for its business, and in the four subsequent years the written down value of the assets admissible for depreciation was determined on that basis. The Income-tax Officer then revised the assessments in respect of the assessment years 1952-53 and 1953-54 and recomputed its taxable income on the footing that since the commencement of the business the assessee must be deemed notionally to have been allowed depreciation under the Bhopal Income-tax Act. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal disagreed with the Income-tax Officer and restored the original assessment. On a reference made by the Appellate Tribunal, the High Court held in favour of the assessee. The Income-tax Commissioner appealed to this court. During the pendency of that appeal, the Central Government in exercise of its power under section 6 of the Act, 67 of 1949, issued an Order called the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (b) of the Explanation added by the 1962 Order. In this connection, contentions (1) and (2) canvassed in that case were precisely the same which have now been raised before us on behalf of the petitioners. Both these contentions were accepted by the court and, as a result, the aforesaid sub-clause (b) of the Explanation was struck down. In that context, Shah J. (as he then was), speaking for the Bench, constituted by seven learned judges, observed: "Exercise of the power to make provisions or to issue directions as may appear necessary to the Central Government is conditioned by the existence of a difficulty arising in giving effect to the provisions of any Act, rule or order. The section does not make the arising of the difficulty a matter of subjective satisfaction of the Government; it is a condition precedent to the exercise of power and existence of the condition, if challenged, must be established as an objective fact." The court held that after the promulgation of the 1949 Order no difficulty survived or arose in giving effect to the provisions of section 10 of the 1922 Act. In that connection, it was observed: "It is impossible, on the words used in section 10(5) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance, by substituting "depreciation fictionally allowed" for "depreciation actually allowed". This, the court held, the Central Government was not competent to do under the garb of removing a "difficulty" which was not proved to have arisen. In Straw Products' case it was averred in the writ petition by the assessee that "no difficulty had arisen in giving effect to the provisions of the Indian Income-tax Act, 1922", and as such, there was no question of the exercise of any power under section 6 of the Merged States Act for the purpose of passing the impugned Order of 1962. This allegation was denied by the respondents, and it was contended on their behalf that the "arising of a difficulty" in the enforcement of the Income-tax Act was a matter for subjective satisfaction of the Government. Precisely similar pleas have been taken in the affidavits of the parties in the present case (vide W. Ps. Nos. 112, 391-394 of 1971). The position here is very much the same as was in Straw Products' case. Here also, the respondents' plea, in substance, is that there is a deficiency or omission in the provisions of sections 32 and 43(6) of the 1961 Act and unless the deficiency or omi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a servile Parliament, now finds acceptance as a practical necessity, in several Indian statutes of post-independence era. Now let us turn to clause (7) of the Regulation. It will be seen that the power given by it is not uncontrolled or unfettered. It is strictly circumscribed, and its use is conditioned and restricted. The existence or arising of a "difficulty" is the sine qua non for the exercise of the power. If this condition precedent is not satisfied as an objective fact, the power under this clause cannot be invoked at all. Again, the "difficulty" contemplated by the clause must be a difficulty arising in giving effect to the provisions of the Act and not a difficulty arising aliunde or an extraneous difficulty. Further, the Central Government can exercise the power under the clause only to the extent it is necessary for applying or giving effect to the Act, etc., and no further. It may slightly tinker with the Act to round off angularities, and smoothen the joints or remove minor obscurities to make it workable, but it cannot change, disfigure or do violence to the basic structure and primary features of the Act. In no case, can it, under the guise of removing a difficul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rules and the orders made thereunder to the areas of the merged States, undoubtedly numerous difficulties arose" and it was, therefore, necessary to devise machinery for removing those "difficulties"--on which Shri Nariman relies--were made by this court in the context of the 1949 Order. They did not relate to the then impugned provision of the 1962 Order. The 1962 Order, Explanation (b), is an instance of an Order foreign to the removal of difficulty clause. The so-called difficulty which was sought to be "removed" by that Order was not a "difficulty" of the kind contemplated by that clause, because it did not, in fact, arise in the application or enforcement of the Income-tax Act, but de hors it. No difficulty in implementing the scheme of the 1922 Act read with the 1949 Order existed as an objective fact. The 1962 Order, Explanation (b), purported to substitute in section 10(5)(b) of the 1922 Act (as adopted by the 1949 Order) "depreciation notionally allowed" for "depreciation actually allowed". This the Central Government was not competent to do under that clause because "depreciation actually allowed" was the linchpin of the statutory definition of "written-down va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first assessment under the Indian Income-tax Act, the written down value would, under this clause (b), work out to be the actual cost of the assets less nil. Thereafter, in each succeeding year the depreciation actually allowed in the preceding year would be deducted causing yearly diminution of the written down value with consequent decrease in the depreciation allowed on that basis. Exactly this was the manner in which the "written-down value" of the assets of the petitioners has been coniputed and depreciation allowed for several assessment years from 1964-65 onwards. This itself demonstrates that there was no difficulty in applying the aforesaid provisions to the cases of these assessees. We find no merit in the argument that the impugned proviso brings about equality of treatment among different assessees in India. The law on the point, was declared by this court in Straw Products Ltd.'s case, about seven years back. If that decision did not correctly interpret the intendment of the legislature, Parliament would have nullified its effect by legislation. As a result, no assessee in the territories of the erstwhile Part B States and Merged States has suffered the disadvantage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraph 2, 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 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 company challanged the validity of paragraph 2 of the Order, particularly the Explanation, inter alia, on the ground that it was ultra vires the powers conferred on the Central Government by section 12 of the Finance Act, 1950. This court upheld the validity of the impugned provision. Therein, it was manifest that in applying the provisions of section 10(5)(b) of the 1922 Act to the assessees from Hyderabad (a Part B State), there was an initial difficulty because the Hyderabad Income-tax Act had been repealed not by the 1922 Act but the Finance Act, 1950. This difficulty could be validly removed by making an Order under section 12 of the Finance Act, 1950. Attempt to remove it by issuing the 1950 Order did not completely achieve its object. In its application that Order led to an anomalous namely, the written down value of the assets and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r taking into account depreciation of assets was out of question in that process of assessment. In the case in hand, the impugned proviso seeks to introduce a new concept of calculating depreciation. By replacing "depreciation actually allowed" with "depreciation deemed to have been allowed" by a fiction of law, even where no depreciation was at all allowed under any law outside the taxable territories, it, in effect, attempts to change the fundamental scheme of the Act. D. B. Ramgopal Mills' case was noticed, explained and distinguished in Straw Products Ltd,.'s case . It was observed that the former did not support the view that "the arising of a difficulty is a matter for the subjective satisfaction of the Central Government". The present case is not in pari materia with D. B. Ramgopal Mills case. It is in line with Straw Products Ltd. v. Income-tax Officer and the ratio of the latter decision and the observations made therein with regard to the then impugned Order of 1962 apply with full force to the impugned proviso in the instant cash. In the light of what has been said above, we accept the contentions (1) contentious (1) and (2) advanced on behalf of the petitioners. ..... 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