1974 (11) TMI 7 - SC - Income Tax

Court Invalidates Proviso on Taxation Laws, Orders Costs

The Court held that the second proviso to clause 2 of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order 2 of 1970 was ... Validity of Removal of Difficulties Order - delegated legislative power under a removal of difficulty clause - written-down value and 'depreciation actually allowed' - substitution of notional or deemed depreciation for depreciation actually allowed - consistency with the scheme and essential provisions of the Income-tax Act - retrospective effect of executive orders to remove difficultiesValidity of Removal of Difficulties Order - delegated legislative power under a removal of difficulty clause - written-down value and 'depreciation actually allowed' - substitution of notional or deemed depreciation for depreciation actually allowed - consistency with the scheme and essential provisions of the Income-tax Act - Second proviso to clause 2 of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order No. 2 of 1970 is ultra vires the power conferred by clause 7 of Regulation III of 1963. - HELD THAT: - Clause 7 empowers the Central Government to make provisions only to the extent necessary to remove a difficulty that objectively arises in giving effect to an Act; the condition precedent of an actual difficulty must be established as an objective fact. The definition of 'written-down value' in section 43(6)(b) pivots on 'depreciation actually allowed' which denotes amounts actually taken into account by tax authorities, not notional or fictionally allowed deductions. The impugned proviso seeks to substitute a fiction of depreciation for depreciation actually allowed where no depreciation was ever computed under the erstwhile Portuguese law, thereby altering the core statutory scheme of depreciation in sections 32 and 43(6). That device is analogous in substance to the Explanation struck down in Straw Products Ltd. v. Income-tax Officer and, unlike the Removal of Difficulties Orders that merely gave effect to previously actually allowed depreciation (as in Ramgopal Mills Ltd.), the proviso here changes the essential connotation of 'written-down value' and effects a substantive amendment to the Act under the guise of removing a difficulty. Such a change exceeds the limited, circumscribed power conferred by clause 7 and is therefore ultra vires.Impugned proviso is ultra vires clause 7 and cannot be sustained; revenue not entitled to levy tax based on depreciation computed under that proviso.Retrospective effect of executive orders to remove difficulties - workability of a Removal of Difficulties provision - carry-forward of unabsorbed depreciation - practical impossibility of retrospective assessments - The impugned proviso is not workable and, by its retrospective operation, would create insuperable difficulties in giving effect to carry-forward rights and in making assessments for the pre-extension period. - HELD THAT: - The Portuguese law operated as a turnover tax and did not permit computation of profits or allow depreciation; moreover, between merger (December 19, 1961) and extension (April 1, 1963) there was no law authorising income-tax assessments in those territories. Section 32(2) permits unlimited carry-forward of unabsorbed depreciation, but to give effect to that right assessments for earlier years would be necessary. Such retrospective assessment machinery cannot be supplied by executive fiat under a removal of difficulty clause; in the absence of parliamentary legislation providing for retrospective assessments to determine losses or inadequate profits in the pre-1963 period, the proviso would, in practice, prevent assessees from claiming carry-forward and would generate legal and administrative impossibilities. Consequently, insofar as the proviso purports to operate retrospectively and is unworkable, it cannot be sustained.Proviso is unworkable in operation and its retrospective application cannot be upheld; it would create difficulties rather than remove them.Final Conclusion: Writ petitions allowed. The second proviso to clause 2 of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order No. 2 of 1970 is ultra vires clause 7 of Regulation III of 1963 and, being inconsistent with the scheme of sections 32 and 43(6) and unworkable in its retrospective effect, cannot be relied upon by the revenue; respondents to pay petitioners' costs. Issues Involved:1. Constitutional validity of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order 2 of 1970.2. Interpretation and application of depreciation provisions under the Indian Income-tax Act, 1961, to Union Territories of Goa, Daman, and Diu.3. The legality of retrospective application of the 1970 Order.4. The practical implications and workability of the 1970 Order.Issue-Wise Detailed Analysis:1. Constitutional Validity of the 1970 Order:The primary issue was the constitutional validity of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order 2 of 1970, promulgated under clause 7 of the Taxation Laws (Extension to Union Territories) Regulation, 1963. This Order extended the Indian Income-tax Act, 1961, with certain amendments, to the Union Territories of Goa, Daman, and Diu. The petitioners challenged the second proviso to clause 2 of the 1970 Order, arguing that it was beyond the powers conferred by clause 7 of the Regulation. The Court held that the impugned proviso was ultra vires the Central Government's powers under clause 7, as it sought to amend the essential provisions of the Indian Income-tax Act by introducing a concept of 'depreciation fictionally allowed' instead of 'depreciation actually allowed.'2. Interpretation and Application of Depreciation Provisions:The Court examined the provisions of sections 32, 34, and 43(6) of the Indian Income-tax Act, 1961, which deal with depreciation. It was noted that the scheme of the Act allows depreciation year after year on the actual cost of the assets as reduced by the depreciation actually allowed in earlier years. The key term 'actually allowed' means depreciation that has been taken into account and given effect to by the income-tax authorities. The Court found that the impugned proviso, which sought to deem depreciation as allowed even when it was not actually allowed under the Portuguese law, was inconsistent with the scheme of the Indian Income-tax Act.3. Legality of Retrospective Application:The Court addressed the contention that the 1970 Order was given retrospective effect, which was argued to be invalid. The Court referred to its earlier decision in Ramgopal Mills Ltd.'s case, stating that the power to remove difficulties must necessarily include the power to remove the difficulty from the very beginning. Therefore, the retrospective application of the 1970 Order was not inherently invalid, but the specific provisions of the Order were found to be beyond the scope of the delegated powers.4. Practical Implications and Workability:The Court also considered the practical implications of the 1970 Order. It was argued that the Order would create difficulties rather than removing them, as it would be impossible for assessees to produce all the accounts of earlier years to show the losses incurred and depreciation entitled. The Court found merit in this argument, noting that the Portuguese law did not provide for depreciation and that there was no machinery to determine losses or insufficient profits for the period before 1963. This made the impugned proviso unworkable and created additional difficulties for the assessees.Conclusion:The Court allowed the writ petitions, declaring that the second proviso to clause 2 of the 1970 Order was ultra vires the Central Government's powers under clause 7 of Regulation III of 1963. The revenue authorities were not entitled to levy tax based on the depreciation allowance computed in accordance with the impugned proviso. The respondents were ordered to pay the costs of the petitioners.