1965 (12) TMI 30 - SC - Income Tax

Court clarifies 'depreciation actually allowed' under Tax Laws Order 1950

The Supreme Court upheld the High Court's interpretation that 'depreciation actually allowed' refers to the depreciation deducted in arriving at taxable ... Computation of aggregate depreciation allowance and the written down value - depreciation actually allowed - interpretation of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 - proviso requiring adoption of the greater of two sums where depreciation has been allowed both under Part B State law and under the Indian Income-tax Act - written down value as defined in section 10(5)(b) of the Indian Income-tax Act, 1922 - rule 33 of the Income-tax Rules, 1922Depreciation actually allowed - written down value as defined in section 10(5)(b) - proviso requiring adoption of the greater of two sums - rule 33 of the Income-tax Rules, 1922 - Construction of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, insofar as it defines which depreciation is to be taken into account in computing the written down value. - HELD THAT: - The Court held that the expressions 'all depreciation actually allowed under any laws or rules of a Part B State', the word 'allowed' in the proviso and the phrase 'taken into account in computing' in the Explanation are to be read as having the same meaning: the amount of depreciation actually allowed in the assessment process. Under section 10(5)(b) written down value for assets acquired before the previous year is the actual cost less the depreciation actually allowed under the Act. Where an assessee was assessed as a non-resident and the Income-tax Officer applied rule 33 to compute the income chargeable in the taxable territories, only that fraction of the total depreciation which was in fact allowed in computing the taxable income for the territories was 'actually allowed' for the purposes of paragraph 2. The manner in which the Income-tax Officer arrived at income (for example, by first computing world income and then striking a proportion under rule 33) does not convert a notional or full deduction in intermediate calculation into an 'actual allowance' for the taxable territory; what matters is the quantum allowed in the assessment of taxable income in the taxable territories. Applying these principles, the High Court's conclusion that 'depreciation actually allowed' means the depreciation deducted in arriving at the taxable income (and not merely the depreciation computed against the total world income) was correct.Paragraph 2 of the Removal of Difficulties Order must be read so that 'depreciation actually allowed' is the depreciation actually allowed in assessment for the taxable territories (i.e., the amount deducted in arriving at taxable income); the High Court's answers on this point are correct.Final Conclusion: The High Court's construction of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, was upheld: 'depreciation actually allowed' means the depreciation deducted in arriving at the taxable income for the taxable territories. Appeals dismissed with costs. Issues Involved:1. Legality and validity of the computation of the written down value of assets under the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950.2. Interpretation of 'depreciation actually allowed' in the context of the Indian Income-tax Act, 1922, and the Indore Industrial Tax Rules, 1927.Detailed Analysis:Issue 1: Legality and Validity of the Computation of Written Down ValueThe primary issue revolves around the interpretation of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, specifically regarding the computation of aggregate depreciation allowances for tax assessment purposes. The respondent company, which was assessed under both the Indian Income-tax Act, 1922, and the Indore Industrial Tax Rules, 1927, faced difficulties due to differing depreciation rates under these laws. The Order stipulated that in cases of disparity, the greater of the two depreciation sums should be adopted. The Income-tax Officer computed the written down value by considering depreciation allowances up to 1944 under the Indian Income-tax Act and from 1945 to 1948 under the Indore Industrial Tax Rules. This computation was upheld by the Appellate Assistant Commissioner and the Appellate Tribunal.The High Court of Madhya Pradesh, however, held that the depreciation allowed up to 1944 should be the one actually allowed against the taxable income, not the world income. The Supreme Court agreed with this interpretation, stating that the key term 'allowed' in the Order means the depreciation actually allowed under the relevant laws. Therefore, the High Court's interpretation that only the depreciation actually allowed in arriving at the taxable income should be considered was upheld.Issue 2: Interpretation of 'Depreciation Actually Allowed'The second issue concerns the interpretation of 'depreciation actually allowed' under the Indian Income-tax Act, 1922, and the Indore Industrial Tax Rules, 1927. The High Court's interpretation, which the Supreme Court upheld, was that the term 'depreciation actually allowed' refers to the depreciation deducted in arriving at the taxable income. The Supreme Court emphasized that the expression 'allowed' in the Order, the proviso, and the Explanation all mean the same thing: the depreciation actually allowed under the relevant laws.The Court clarified that during the years when the assessee was taxed as a non-resident, only a fraction of the total depreciation was actually allowed in ascertaining the taxable income in India. The Income-tax Officer's method of first calculating the total world income and then applying Rule 33 to determine the taxable income in India did not mean that the entire depreciation was allowed. Only the proportionate amount of depreciation relevant to the income taxable in India was actually allowed.Separate Judgment by Shah J.Shah J. delivered a separate judgment, concurring with the majority but providing additional reasoning. He emphasized that the entire depreciation considered in determining the total world income should be taken into account for the written down value. He disagreed with the High Court's view that only a fraction of the total depreciation should be considered. Shah J. argued that depreciation is deducted once and for all in determining the total profits of the business, and there is no basis for assuming that only a fraction of the depreciation is allowed.ConclusionThe Supreme Court dismissed the appeals, upholding the High Court's interpretation that the depreciation actually allowed means the depreciation deducted in arriving at the taxable income. The Court clarified that only the proportionate amount of depreciation relevant to the income taxable in India should be considered in computing the written down value of assets. Shah J.'s separate judgment, while concurring with the majority, provided a different perspective on the interpretation of depreciation allowances.