TMI Blog1965 (12) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Rules, 1922, no depreciation was allowed at all in ascertaining the taxable income on India, for that was only taken into consideration in arriving at the total world income is not acceptable as we may say that the learned counsel did not press this point seriously either. As we have indicated earlier, only a fraction of the amount of depreciation was actually allowed in the assessment of the income accrued in India. We do not propose to express any opinion on the question whether, if the other methods suggested in rule 33 of the Rules were adopted, it could be held that no depreciation was actually allowed in making the assessment. Appeal dismissed. - - - - - Dated:- 7-12-1965 - Judge(s) : K. SUBBA RAO., J. C. SHAH., S. M. SIKRI JUDGMENT [The judgment of Subba Rao and Sikri JJ. was delivered by Subba Rao J. Shah J. delivered a separate judgment.] SUBBA RAO J.---These appeals raise the question of construction of the provisions of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, hereinafter called "the Order," in the matter of computation of the aggregate depreciation allowances for the purpose of assessment to tax. Nandlal Bh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, the Appellate Tribunal, confirmed the orders of the Income-tax Officer. At the instance of the assessee, the following questions, among others, were referred to the High Court of Madhya Pradesh, Jabalpur : "(1) Whether the computation of the written down value of the assets of the applicant in the light of the provisions of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, is legal and valid ? (2) Whether the provisions of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, and the subsequent modifications thereof were valid in law in the light of the provisions of the Indian Income-tax Act, 1922, the Finance Act, 1950, and the Constitution of India? (3) Whether the Indore Industrial Tax Rules, 1927, could be regarded as rule or law of a Part B State for the purpose of the said Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, and if so, whether the same are valid in law ? and (4) Whether the depreciation 'actually allowed' means the depreciation deducted in arriving at the taxable income or in arriving at the world income ?" Before the High Court the third question was not pressed; and the second ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of the provisions of the Order. It is, therefore, necessary to read the relevant provisions of the Order. " Paragraph 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 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-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 assets, 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. 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 the aggregate allowance for depreciation taken into account in computing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was conceded that the rates under the Indian Income-tax Act were higher for some years than those obtaining under the laws in force in the Indore State. The question, therefore, is what was the amount actually allowed to the assessee towards depreciation under the Income-tax Act during the years up to and inclusive of 1944. This would depend upon the provisions of the Indian Income-tax Act. Under section 10(2) of the Indian Income-tax Act, profits or gains of business shall be computed after making the allowances enumerated therein. Under clause (vi), in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other cases, to such percentage on the written down value thereof as may in any case or class of cases be prescribed is allowed. Under section 10(5)(b), "written down value" means in the case of assets acquired before the "previous year" the actual cost to the assessee less the depreciation actually allowed to him under the Act. Under the Indian Income-tax Act, income is to be char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, such profits being computed in accordance with the provisions of the Indian Income-tax Act, as the receipts so accruing or arising bear to the total receipts of the business, or in such other manner as the Income-tax Officer may deem suitable. Under this provision, the Income-tax Officer could proceed thereunder only if he could not ascertain the actual amount of the income, profits or gains accruing or arising to a non-resident. If he could not, he could adopt one or the other of the three methods mentioned in the rule to ascertain the said income. Two of the said methods permit the Income-tax Officer to make a reasonable or suitable estimate of such income. But under the third method, which was adopted in the present case, the amount of such income for the purpose of income-tax shall be calculated on an amount which bears the same proportion to the total profits of the business of such person as the receipts so accruing or arising bears to the total receipts of the business. The working out of this method may best be understood by an illustration. Suppose the total profit of a business is Rs. 100 and the receipt in India is Rs. 25, i.e., the income accrued in India is one-four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actually allowed in ascertaining the taxable income in India. Learned counsel for the assessee contended that under the method adopted in terms of rule 33 of the Income-tax Rules, 1922, no depreciation was allowed at all in ascertaining the taxable income on India, for that was only taken into consideration in arriving at the total world income. We cannot accept this argument--- we may say that the learned counsel did not press this point seriously either. As we have indicated earlier, only a fraction of the amount of depreciation was actually allowed in the assessment of the income accrued in India. We do not propose to express any opinion on the question whether, if the other methods suggested in rule 33 of the Rules were adopted, it could be held that no depreciation was actually allowed in making the assessment. Our conclusion finds support in the judgment of the Bombay High Court in Hukumchand Mills Ltd. v. Commissioner of Income-tax. We endorse the view expressed therein. In the result, we hold that the High Court has given correct answers to questions Nos.1and 4 referred to it. The appeals fail and are dismissed with costs. SHAH J.---The respondent, a publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the answer that depreciation allowed in the years up to and inclusive of the year 1944 in the assessment made in the taxable territories would be the depreciation which was actually allowed against the total income, and not the depreciation computed against the total world income, and on the fourth question that the depreciation " actually allowed " means depreciation deducted in arriving at the taxable income. With certificate granted by the High Court, this appeal has been preferred. Under the Indore Industrial Tax Rules, 1927, depreciation was allowed at certain rates in respect of buildings, plant and machinery. By section 10(2)(yi) of the Indian Income-tax Act, in computing profits or gains of a business, depreciation allowable in respect of buildings, machinery, plant and furniture used for the purpose of business being the property of the assessee, is a sum equivalent to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed, and, in any other case, at such percentage on the written down value thereof as may in any case or class of cases be prescribed. By sub-section (5) of section 10, written down value in sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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." But the expression "all depreciation actually allowed under any laws or rules of a Part B State" in paragraph 2 was ambiguous. The Central Government purported to issue a notification under section 60A of the Indian Income-tax Act incorporating an Explanation to paragraph 2, but the notification was declared by the High Court of Hyderabad as invalid : S. V. Naik v. Commissioner of Income-tax. Thereafter, the Central Government issued an amendment to the Order in exercise of the powers under section 12 of the Finance Act, 1950, and incorporated an Explanation with retrospective operation. The Explanation which became effective from May 8, 1956, provided : " 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 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fraction of the total depreciation allowance taken into account in levying charge upon a part of the taxable income at a rate determined by the total world income. That is stated in paragraph 10 of the judgment of the Tribunal : "The last contention of the assessee is that the Income-tax Officer should not have taken the full depreciation availed of in the preceding years, but that the depreciation should be apportioned in the same manner as the income brought to assessment. The deduction should only be made in respect of that depreciation which can reasonably be attributable to the Indian income. We think that the law does not make any distinction as to the part of income which was brought to assessment under the Indian Income-tax Act. If depreciation has in fact been availed of by the assessee either under the Indian Income-tax Act or under the Industrial Rules of the State deduction has to be made." The High Court did not accept this view. They observed in paragraph 8 of their judgment : " . . . the depreciation in respect of an asset under the Indian Income-tax Act would clearly be the one actually allowed as laid down in section 10(5)(b) and the depreciation under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equal to the fraction which the income taxable under the Indian Income-tax Act bore to the total income of the company. But depreciation determined according to the rules merely enters into the computation of taxable profits, whether the assessee is a resident or a non-resident. In the assessment of a company the same rates of tax apply under the Indian Income-tax Act, whether the company is resident or non-resident. If the company is resident under section 4A(c) its entire world income would be chargeable, subject of course to special exemptions like those provided by section 14(2)(c) : if it is non-resident only a slice of that income would be chargeable. In determining the chargeable income from business, profession or vocation and the rate applicable thereto the same rules apply, whether the company is, taxed as resident or non-resident. Under the scheme of the Income-tax Act depreciation like any other allowance has to be allowed in computing the total profit : after the total profit is determined depreciation does not survive as a separate head of allowance. A part only of the total profit of a company determined in the manner prescribed by section 10 may, for reasons already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipts so accruing or arising bear to the total receipts of the business (such profit being computed in accordance with the provisions of the Indian Income-tax Act); and (3) in such other manner as the Income-tax Officer may deem suitable. In the computation of income of a non-resident by the second method it may be necessary to determine and allow depreciation. When the first or the third method is resorted to, determination of depreciation would normally be out of place, because by the first method the income is taken as a percentage of the turnover accruing or arising, and by the third method taxable income may be determined in such other manner as the Income-tax Officer deems suitable. Paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, applies only to cases in which in making an assessment under the Indian Income-tax Act depreciation allowed has to be taken into account in computing the total profits or income. Where the question of considering the depreciation allowed does not arise, because in the method adopted determination of depreciation does not enter, paragraph 2 of necessity would have no application. What must, however, be n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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