TMI Blog1964 (1) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 assessee's 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt 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 Section 34(1) repealed the 1949 Ordinance and section 34(2) laid down that notwithstanding this repeal anything done or any action taken in the exercise of any power conferred by it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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts 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 Officer's 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 Officer's 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 assessee's 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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. It may be assumed that the assets were purchased in 1942-43. In 1943-44 there was no income-tax in force at all. The assessee's income became liable to income-tax for the first time for the assessment year 194 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, prior to 1949-50, the previous year relevant to the assessment year in question. Therefore, the written down value had to be the original cost less all depreciation actually allowed under the Income-tax Acts. The sole question is whether any depreciation was actually allowed under any Income-tax Act within the meaning of section 10(5)(b). The answer is, strictly according to the facts, no . No income-tax was payable by the assessee previous to the assessment year 1950-51 and, consequently, there had been no occasion for its being allowed depreciation in the previous years. The written down value of the assets in the accounting year 1949-50 was the original cost less nil, i.e., the original cost. The argument advanced on behalf of the Commissioner of Income-tax that the original cost can be the written down value only when the assets were acquired in the accounting year is not quite correct; if the assets were acquired in the accounting year the original cost will certainly be the written down value but the original cost can be the written down value even if the assets were acquired earlier. What is required to be deducted from the original cost under section 10(5)(b) is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act. The only depreciation allowed under an Income-tax Act is the depreciation allowed by any Income-tax Officer when computing its profits and gains of business for assessment purposes. Actually allowed means allowed by an income-tax authority; depreciation claimed by the assessee itself in its own accounts is not depreciation allowed to it. Unabsorbed depreciation, e.g. depreciation which cannot be deducted from profits and gains of the business because there is a loss, is not deemed to be actually allowed. If the written down value of assets in a year is ₹ 100 and the prescribed percentage of depreciation is ₹ 10, ₹ 10 will be deducted from the profits of the year. But if there were no profits in the year there was nothing from which ₹ 10 could be deducted and from the next year's profits, if any, ₹ 10 will be deducted in addition to the depreciation of the next year. This means that depreciation was not actually allowed in the first year. Similarly, depreciation is not actually allowed when there is no assessment of income-tax and consequently, no computation of profits and gains of the business. Nothing depends upon the fact that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls Ltd. [1949] 17 I.T.R. 130, in the accounting year 1941, no depreciation was allowed on the written down value because the business suffered a loss and Dass and Mukherjea JJ. of the Calcutta High Court held that the written down value in the next accounting year 1942 was the same as in the accounting year 1941, because no depreciation had actually been allowed. The learned judges observed at page 134: The words 'actually allowed' are unambiguous and connote the idea that the allowance was in fact given effect to....... In the present case, as there was loss, the depreciation allowance of Rs........... was not set off and cannot be said to have been actually allowed. There is no distinction between a depreciation not set off on account of a loss and a depreciation not set off because of exemption from income- tax and if in one case the depreciation cannot be said to have been actually allowed, in the other case also it cannot be said to have been actually allowed. In the second case (of Vankadam Lakshminarayana [1962] 43 I.T.R. 526), Chandra Reddy C.J. and Kumaraiah J. said at page 530 with regard to the words depreciation actually allowed that: Havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, after the proviso to paragraph 2, the following Explanation shall be inserted, namely: 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 Income-tax Act of 1922 was repealed by the Income-tax Act, No. 43 of 1961. Section 32 of it deals with depreciation allowance and section 43 explains actual cost and written down value. Section 297 of it repeals the Income-tax Act of 1922, but keeps it alive in respect of a return of income filed before the commencement of the 1961 Act, e.g., April 1, 1962, by any person fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amendment Order and the Amendment Order governs future cases and pending cases but does not govern past or closed cases. The Explanation deals with the definition of written down value in section 10(5). The question what was the written down value in the instant case could be said to be pending so long as the assessment proceedings were pending either before the Income-tax Officer or before the Appellate Assistant Commissioner or before the Tribunal. When the Tribunal decided the appeal its order became final. But there was no finality in respect of any question of law decided by it and its decision was subject to the judgment passed by this court on reference. The reference, however, had to arise out of the order passed by it; no question not decided by it could be referred by it to this court and this court has no jurisdiction whatsoever to decide it. All questions decided by it had to be decided in accordance with the law then existing and, therefore, the only question that could be referred by it to this court and can be answered by this court is a question relating to the law existing when the Tribunal decided the appeal. When it decided the appeal the Explanation did not ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 1962 Amendment Order is applicable in the instant case or not is itself a question of law and is a question of law that does not arise out of the order passed by the Tribunal or the statement of the case submitted by it. This court cannot consider the Explanation unless it holds first that the Explanation is applicable and if it is precluded from deciding that it is applicable it follows that it cannot consider it. According to the Explanation the depreciation that would have been allowed if the income had not been exempted is to be treated as depreciation actually allowed. What depreciation would have been allowed raises some questions of fact, namely, what assets were used in the business and for what period, what was the law in the Rampur State Income-tax Act regarding depreciation and written down value and what were the percentages fixed by the Rampur State for allowing depreciation of written down values of different kinds of assets. Foreign law is a question of fact. None of these questions can be answered by this court, firstly, because they are of a fact and, therefore, outside its jurisdiction and, secondly, because there is or may be no relevant evidence and the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en D. Mahadevia v. Commissioner of Income-tax [1960] 39 I.T.R. 540, 544; [1960] 3 S.C.R. 417, in the following words: Section 66....only permits a reference of a question of law arising out of the order of the Tribunal. It does not confer jurisdiction on the High Court to decide a different question of law not arising out of such order. It is possible that the same question of law may involve different approaches for its solution, and the High Court may amplify the question to take in all the approaches. But the question must still be one which was before the Tribunal and was decided by it. It must not be an entirely different question which the Tribunal never considered. The 1962 Amendment Order is amendatory and not clarificatory and it cannot be contended that the Explanation added by it simply makes clearer that actually allowed includes what would have been allowed if there had been no exemption. Actually allowed cannot include not actually allowed but deemed to have been allowed or which would have been allowed if the income had not been exempted and it is only by virtue of the Explanation that the meaning of actually allowed is enlarged so as to include tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of section 10(2) and (5) of the 1922 Act relate to assessment orders and so long as they were kept in force notwithstanding the repeal of the 1922 Act and the 1949 Act was in force, the Central Government retained the power to remove difficulties arising in applying the provisions of section 10(2) and (5) to assessee of the merged States. The 1962 Order was not, and could not be, made in exercise of the powers conferred by section 298(2) of the 1961 Act. Another contention advanced on behalf of the assessee was that section 298(2) of the Act of 1961 impliedly repeals section 6 of the 1949 Act, but I am unable to accept it. The two provisions occupy different fields and the doctrine of implied repeal is not applicable. Section 298 confers power upon the Central Government to make an order for removal of difficulties arising in giving effect to the provisions of the 1961 Act, whereas section 6 of the 1949 Act confers power to remove difficulties arising in giving effect to the provisions of the 1922 Act in the merged States. The 1922 Act and the 1961 Act apply in mutually exclusive circumstances; in no case can both apply. When the provision of the 1961 Act apply, diffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing it to Part B States and the Central Government made the Taxation of Part B States (Removal of Difficulties) Order. Section 2 of it is similar to section 2 of the 1949 Removal of Difficulties Order but contains an Explanation, added in 1956, which is similar to sub-section (a) added by the 1962 Removal of Difficulties Amendment Order. The Explanation does not contain part (b) of our Explanation. It was discussed by the Supreme Court in Commissioner of Income-tax v. Dewan Bahadur Ramgopal Mills Ltd. [1961] 41 I.T.R. 280; [1961] 2 S.C.R. 318, but the judgment contains nothing helpful in the instant case. In the result, I conclude that the question should be answered without regard to the Explanation added in the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, by the Amendment Order of 1962. The answer will be that the written down value of the assets is the original cost. Copies of this judgment should be sent under the seal of the court and the signature of the Registrar to the Income-tax Appellate Tribunal and the Commissioner of Income-tax, U.P., as required by section 66(6) of the Income-tax Act. The assessee will get its costs of this referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is sought to be placed by this court as to the jurisdiction of the High Court under section 66 undoubtedly raises serious implications and makes retrospective amendatory legislation after the Tribunal has given its decision in appeal of little or no avail to the department so far as that particular case is concerned, even though a reference may be pending at the time when the fresh provision or amendment is enacted. The jurisdiction of the High Court under section 66 undoubtedly is a narrow one but is it so narrow as to prevent it from considering a provision which did not exist when the Tribunal decided the case but which if considered would provide a complete answer to the question referred? No decision has been brought to our notice which goes to the extent of saying that a retrospective amendatory legislation which did not exist when the Tribunal decided the appeal can be taken into consideration when answering the reference. There can be no doubt that an appellate court cannot shut its eyes but it must decide the appeal in accordance with the law as it exists on the day when it gives its decision. The Federal Court in Raja Bhadur Kamakshya Narain Singh of Ramgarh v. Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erlooked and which by itself furnished the answer to the question referred for the opinion of the High Court. The question which confronts this court, however, is somewhat different and that is that when a provision is amendatory, though retrospective, but it was never considered by the Tribunal as it could not have been, then is it open to the High Court, not on appeal but on a reference, to take that amendatory provision into consideration in answering the question referred to it for its opinion? The answer will depend on whether the question posed can be said to arise out of the order of the Tribunal. It is well-settled and the statute is clear on the point that only those questions can be referred and answered by the High Court which arise from the order of the Tribunal. In Chatturam Horilram Ltd. v. Commissioner of Income-tax [1955] 27 I.T.R. 709; [1955] 2 S.C.R. 290 a passing doubt was expressed by the Supreme Court as to whether the High Court could take notice of a subsequent legislation which was not there when the Tribunal decided the appeal in answering the question referred. The Supreme Court again in Kusumben D. Mahadevia v. Commissioner of Incometax [1960] 39 I. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e doctrine of continuity of proceedings in its application to a reference under section 66 of the Act. It is not enough to say that the High Court must answer the question referred to it but it must answer the question referred to it as arising out of the Tribunal's order. No question, not arising out of the Tribunal's order, can be referred to it nor can be answered by it. The question of law can only arise out of an order if it is in respect of a law then in force. It would be difficult to hold that a law which did not exist on the date of the Tribunal's order but enacted subsequently can be said to give rise to a question of law arising out of the Tribunal's order, particularly when it cannot be said to be merely a different aspect of the same question. Such a question would be on a different provision of law and it might well be considered to be a distinct question. When the Tribunal referred the case the question that arose out of its order was whether the assessee had actually been allowed any depreciation and this had to be answered in the negative on the basis of the facts and the law then in force. During the pendency of the reference the law was altered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to well recognised principles of accountancy depreciated his assets and created a reserve fund for the ultimate replacement of its assets whose wear and tear was inevitable. The factual position, therefore, was that no depreciation under the Rampur Act or Rules had actually been allowed to the assessee because of the existence of the exemption agreement with the Ruler. The Removal of Difficulties Order, 1949, was also of no assistance to the revenue as it never provided for a contingency such as arising in the present case where the assessee was exempt from tax by the Ruler of the State. There was, therefore, no alternative for the Tribunal but to have taken the original cost as provided in sections 10(5) and 10(2)(vi) of the Act, for the purposes of computing the written down value and the depreciation allowed when the Act of 1922 came to be applied for the first time. The words actually allowed mean exactly what those words say. That is also what was held by the Calcutta, Madras, Madhya Pradesh and Bombay High Courts in Commissioner of Income-tax v. Kamala Mills Ltd. [1949] 17 I.T.R. 130, Vankadam Lakshminarayana v. Commissioner of Income-tax [1961] 43 I.T.R. 526, Nandlal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present reference which was pending when the Act of 1961 came into force had to be disposed of not under the Act of 1961, but under the Act of 1922 and the Rules and Orders made thereunder. The repealed Act, i.e., the Act of 1922, is declared to be dead and buried by virtue of section 297(1) of the Act of 1961, but it is again resuscitated and kept alive under section 297(2)(c) of the Act of 1961 for certain purposes. If any difficulty is experienced in giving effect to the provisions of section 297(2)(c) of the Act of 1961, which again brings to life the repealed Act of 1922, then the Central Government is given the power under section 298 of the Act of 1961, to remove that difficulty so long as that order is not inconsistent with the provisions of the 1961 Act. The legislature, after giving the general power to remove difficulties under section 298(1) of the Act of 1961, was at pains to lay down in sub-section (2) of section 298 that the power to remove difficulties will include the power to provide for modification and adaptation subject to which the repealed Act shall apply to all assessments pending on the 31st March, 1962, and prior thereto. Sub-section (2), therefore, cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Income-tax Act, 1922, but under the State income-tax law. This section of the Order provided for taking into consideration under the Indian Income-tax Act all depreciation which may have been allowed under the State Income-tax Act or Rules. The Ordinance of 1949 in due course gave way to Act 67 of 1949. By section 3 of that Act, the Indian Income-tax Act of 1922 was made applicable to all merged territories as from April 1, 1949. Section 6 contained a provision similar to section 8 of the Ordinance of 1949 for the removal of difficulties. The Ordinance was repealed but all action taken under the provisions were saved and all such action taken thereunder were deemed to have been taken under Act 67 of 1949. There was, as already noticed, no provision in the Removal of Difficulties Order, 1949, to cover a situation that arose as in the present case. That order never provided for the contingency where though income-tax was extant in the State but its application was specifically exempted by an agreement with the Ruler. The amendment made in 1962 by adding the Explanation was to remove this lacuna in the Order of 1949, which provided that depreciation that would have been allo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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