1967 (10) TMI 2 - SC - Income Tax

Supreme Court Invalidates Taxation Laws Amendment Order, 1962

The Supreme Court declared the Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, 1962 invalid as it did not demonstrate the ... Power to remove difficulties - condition precedent - objective enquiry into existence of difficulty - invalidity of an order issued in absence of a difficulty - ultra vires exercise of delegated power - 'depreciation actually allowed' construed as allowance given effect to - written down value computationPower to remove difficulties - condition precedent - objective enquiry into existence of difficulty - invalidity of an order issued in absence of a difficulty - Validity of the Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, 1962 (Explanation, clause (b)) issued under section 6 of Act 67 of 1949 - HELD THAT: - Section 6 of Act 67 of 1949 empowers the Central Government to make provisions or give directions 'as may appear to it to be necessary for removal of the difficulty' arising in giving effect to Acts extended to merged States. The Court held that the 'arising of difficulty' is a condition precedent to exercise of that power and is not left to the Government's purely subjective satisfaction; the existence of the difficulty, if challenged, must be established as an objective fact. The earlier Removal of Difficulties Order, 1949, had already provided for taking into account depreciation actually allowed under merged State laws and thereby removed the difficulty in applying the Income-tax Act to the merged States. The material relied on by the Government (a departmental noting and the fact that revenue contentions were rejected by courts) did not establish that a difficulty of the kind contemplated by section 6 remained. Consequently the 1962 Explanation (clause (b)) purportedly promulgated to remove a non-existent difficulty was unauthorised and invalid as an exercise of the delegated power.Clause (b) of the Explanation in the 1962 Amendment Order is ultra vires the Central Government under section 6 of Act 67 of 1949 and invalid.'depreciation actually allowed' construed as allowance given effect to - written down value computation - Meaning of the expression 'all depreciation actually allowed under any laws or rules of a merged State' for purposes of computing written down value and depreciation allowance - HELD THAT: - The Court reaffirmed the construction that 'depreciation actually allowed' means depreciation which has been actually given effect to in assessment (i.e., taken into account in assessing the income) and not merely depreciation that might have been allowable or would have been allowed notionally had the assessee not been exempted. That construction had been applied in earlier decisions and in the 1949 Removal of Difficulties Order; it governs the computation of written down value and the aggregate depreciation allowance under section 10(2)(vi) read with section 10(5) of the Income-tax Act, 1922, as extended to the merged States.For determining written down value and the depreciation aggregate, only depreciation actually given effect to in assessments under the merged State laws is to be taken into account; notional or hypothetical allowances are not included.Final Conclusion: The appeal is allowed. Clause (b) of the Explanation in the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1962, is declared ultra vires when made under section 6 of Act 67 of 1949; revenue authorities are not entitled to compute or levy tax on the basis of depreciation allowance claimed under that clause. Costs awarded to the assessee. Issues Involved:1. Validity of the Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, 1962.2. Condition of 'arising of difficulty' for exercising power under section 6 of Act 67 of 1949.3. Consistency of the 1962 Order with the scheme and essential provisions of the Income-tax Act, 1922.4. Excessive delegation of legislative power under section 6 of Act 67 of 1949.5. Applicability of section 298 of the Income-tax Act, 1961, for removing difficulties.6. Violation of Article 14 of the Constitution by the assessment orders.Issue-wise Detailed Analysis:1. Validity of the Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, 1962:The Supreme Court found the 1962 Order invalid because no 'difficulty' was proved to have arisen justifying the invocation of the power under section 6 of Act 67 of 1949. The court emphasized that the expression 'depreciation actually allowed' connotes depreciation taken into account in assessing the income of an assessee and does not mean depreciation merely allowable under the taxing provision. The impugned Order sought to alter this connotation, which was not justified as no actual difficulty had arisen.2. Condition of 'arising of difficulty' for exercising power under section 6 of Act 67 of 1949:The court held that the exercise of power to make provisions or 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. This is not a matter of subjective satisfaction of the Government but an objective fact that must be established if challenged. The High Court erred in holding that the decision of the Central Government regarding the arising of a difficulty was conclusive.3. Consistency of the 1962 Order with the scheme and essential provisions of the Income-tax Act, 1922:The court noted that the impugned Order was unauthorized as it sought to remove a difficulty that had not arisen. The 1949 Order had already addressed the issue of determining the depreciation allowance under section 10(2)(vi) of the Income-tax Act, 1922, for assessees in merged States. The 1962 Order, therefore, was not consistent with the scheme and essential provisions of the Income-tax Act, 1922.4. Excessive delegation of legislative power under section 6 of Act 67 of 1949:Since the court found the 1962 Order invalid on other grounds, it did not express an opinion on whether section 6 of Act 67 of 1949 amounted to excessive delegation of legislative power.5. Applicability of section 298 of the Income-tax Act, 1961, for removing difficulties:The court did not find it necessary to determine whether the power to remove difficulties should have been exercised under section 298 of the Income-tax Act, 1961, after the repeal of the Income-tax Act, 1922.6. Violation of Article 14 of the Constitution by the assessment orders:The court did not express an opinion on whether the assessment orders violated Article 14 of the Constitution, as it had already found the 1962 Order invalid on other grounds.Conclusion:The appeal was allowed, and the order passed by the High Court was set aside. The Supreme Court declared that clause (b) of the Explanation in the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1962, was ultra vires the Central Government when exercising the power under section 6 of Act 67 of 1949. The revenue authorities were not entitled to levy tax based on depreciation allowance computed in accordance with that clause. The assessee was awarded costs from the respondents in both the Supreme Court and the High Court.