859
COMMISSIONER OF INCOME-TAX, BOMBAY
_v._
DHARAMPUR LEATHER CLOTH CO. LTD., BOMBAY
_December_ 3, 1965
[K. SUBBA RAO, J. C. SHAH AND S. M. S!KRI, JJ.J
_Indian Income-tax Act,_ 1922 _s._ _10(5)(b)-Depreciation_ _'actually_
_alloived'-Whether_ _includes depreciation that n1ight have been allowed_ _if_
_income_ _had_ _1wt_ _been exempted._
_Taxation Laws (Merged States) (Removal_ _of_ _Difficulties) (Amend-_
_ment)_ _Order,,_ _1962-Company_ _exempted_ _by_ _Ruler_ _of_ _Indian State_ _from;_
_taxation-:---After merger_ _exe1nption_ _given under para_ 15 _of_ _Merged States_
_(Taxation_ _Concession)_ _Order,_ _1949-Exemption_ _by_ _Commissioner_
_whether a continuation_ _of_ _the_ _argee.11ent_ _ivith the Ruler._
The respondent company obtained under an agreement with the
Ruler of the erstwhile State of Dharampur an exemption from levy of
income-tax and super-tax for the first seven years of its working. It
commenced business in June 1949. In August 1949 the State of
Dharampur merged with the Province of Bombay. The company then
applied for and obtained under para 15 of the Merged States (Taxation
Concession) Order, 1949, an exemption from income-tax a:iiil -supper-tax
for five years commencing from April, 1950. In the assessment year
1956-57 when the company was to be assessed under the Indian Incometax Act, 1922, for the first time, it claimed that us no depreciation had
actually been allowed to it earlier the original cost of its machinery etc.
should be taken as the written down value for the purpose of calculating
the allowable depreciation. The assessing and appellate authorities held
against the company but the High Court held in its favour. In appe.al
to this Court by the Revenue it \Vas contended that ( 1) on a proper interpretation of s. 10(5) (b) of the Indian Income-tax Act, 1922 the depreciation must be deemed to have been allowed to the assessee in the
years in which its income was exempted and (2) the concession given
by the Commissioner must be, deemed to be a continuation of the: agreement with the Ruler and therefore the Taxation Laws (Merged States)
(Removal of difficulties) Order 1949 as amended bv the Taxation Laws
(Merged States) (Removal of Difficulties) (Amendment Order) 1962
applied to the facts of the case. '
HELD: (i) The words 'actually allowed' in s. 10(5) (b) did not include any notional allowance and the High Court had rightly decided
that the original cost was the written down value. [862 CJ
_Co1nmissioner_ _of_ _Income-tax, Madhya_ _Pradesh_ v. _Mis. Straw Pro-_
_ducts Limited, Bhopal,_ [1966] S.C.R. applied.
(ii) The exemption granted _to_ the company under para. 15 of the
Merged States (Taxation Concession) Order, 1949 was an exemption
under s. 60A of the Income-tax Act and not under any agreement. The
case of the assessee had therefore to be determined with reference to
s. 10(5) (b) of the Act unaffected by the amendment made by the 1962
Order. [862 G]
C1v1L APPELLATE JURISDICTION : Civil Appeal No. 956 of
1964.
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860 SUPREME COURT REPORTS [1966) 2 s c ..
Appeal by special leave from the judgment and order dated **A**
October 7, 9, 1961 of the Bombay High Court in I.T. Reference
No. 6 of 1960.
_A. V. Viswanatha Sastri, Gopal Singh, B. R. G._ _K._ _Achar_ and
_R._ _N. Sachthey,_ for the appellant.
_Mahinder Narain, Rameshwar Nath,_ _S._ _N._ _Andley_ and _P._ _L._ **B**
_Vohra,_ for the respondent.
The Judgment of the Court was delivered by
**Sikri,** **J.** **This** **appeal** **by** special leave is directed against the
judgment of the High Court of Judicature at Bombay answering c
the following question against the appellant :
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"Whether depreciation is allowable on the original
cost of the various components of the Plant and Machinery and other assets of the company as acquired and
used prior to 1-7-1953 ?"
The relevant facts are these. We are concerned with the assessment year 1955-56 (accounting year being April 1, 1954 to March
**D**
31, 1955). The respondent, Dharampur Leather Company **Ltd.,**
Bombay, hereinafter referred to as the assessee company, was incorporated on June 15, 1943, as a private limited company, and
later on November 24, 1949, it became a public limited company. E
On August 1, 1949, the Dharampur State merged with the Province of Bombay. Before its incorporation, the promoters of the
assessee company had negotiated with the Ruler of Dharampur and
secured from the Ruler total exemption from the State Income
Tax of profits of the company for a period of seven years from F
the commencement of its working. The factory commenced
working from June 15, 1949. After the merger the assessee
company applied to the Commissioner of Income Tax, Bombay,
by its letter dated June 22, 1951, for relief under para 15 of the
Merged States (Taxation Concessions) Order, 1949. The Commissioner of Income Tax communicated the decision of the Gov- G
ernment in his letter dated March 8, 1952, to exempt the company from income tax and super tax for a period of five years
with effect from April 1, 1950. It was, however, stated that **the**
shareholders of the company would be liable to pay tax on the
amount of dividend received by them.
The Merged States (Taxation Concessions) Order, 1949, ' was **H**
issued by the Central Government in exercise of the powers conferred by s. 60A of the Indian Income Tax Act, 1922, hereinafter
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C.I.T. _v._ DHARAMPUR LEATHER CO. _(Sikri,_ J.) 861
A referred to as the Act, and s. 23A of the Business Profits Tait Acn,
194 7. Para 15 of the said order provides as follows :
"15 ( 1) Where any industrial undertaking situate in
a merged State claims that it has been granted any
exemption from or ~oncession in respect of income-tax,
super-tax or business profits tax by the Ruler of the State
before the 1st day of August, 1949, it shall submit an
application to the Commissioner of Income-tax giving
the following particulars :1. Name of the Industrial undertaking.
2. Status _(i.e._ whether public or private company,
firm, individual or Hindu undivided family).
3. Nature of business.
4. Date of commencement of the business.
5. Nature of the concessions granted.
6. Period for which concessions granted.
7. Unexpired period of the concessions from the 1st day
of August, 1949.
(2) The application shall be accompanied by a copy
of the orders of the State granting the concession or of
the agreement with the State.
( 3) The Commissioner shall, after obtaining such
other information as he may require, forward the application to the Central Government which, having regard
to all the circumstances of the case, may grant such relief,
if any, as it thinks appropriate."
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F The assessee company contended before the Income Tax
Officer in the course of the assessment proceedings for the assessment year 1955-56 that this being the first assessment year after
it commenced working as a factory, no depreciation had in fact
been actually allowed to the assessee in any earlier assessment
year, and, therefore, the depreciation should be computed on the
G original cost of the various items of plant and machinery and other
assets of the company. The Income Tax Officer, however, rejected this contention and held that depreciation must be computed
on the written-down values of machinery computed as if the income
_1_ of the assessee had been worked out properly in the years when
the company was exempted and the depreciation being allowed at
H the usual rates. The assessee failed before the Appellate Assistant Commissioner and the Appellate Tnounal. The Appellate
Tribunal held that the words "actually allowed" in s. 10 ( 5 )(b)
862 SUPREME COURT REPORTS [1966] 2 S.C.R.
of the Act were wide enough to cover the case of the assessee. A
The High Court, however, held that if in the prior years no depreciation had been actually allowed then the actual cost incurred by
the assessee for acquiring the machinery would be the writtendown value of the machinery.
Mr. Sastri, the learned counsel for the appellant, first urges
that on a proper interpretation of s. 10(5)(b) of the Act, the B
depreciation must be deemed to have been allowed to the assessee
in the years in which the income of the assessee company was
exempted. There is no force in this contention. We have delivered judgment today in _Commissioner_ _of Income Tax, Madhya_
_Pradesh_ v. _Messrs Straw Products Limited Bhopal(')_ and held C
that the words "actually allowed" in para 2 of the Taxation Laws
(Merged States) (Removai of Difficulties) Order, 1949, did not
include any notion&! allowance. Following that judgment, we
must interpret the words 'actually allowed' occurring in
s. 10(5)(b) of the Act in the same manner.
Mr. Sastri next contends that the Taxation Laws (Merged D
States) (Removal of Difficulties) Order, 1949, as amended by
the Taxation Laws (Merged States) (Removal of Difficulties)
(Amendment) Order, 1962, hereinafter referred to as 1962 Order,
applies to the facts of the case. He says that the exemption was
originally given by the Ruler of Dharampur State under an agreement with the assessee company and the concession by the Com- E
missioner of Income Tax _vide_ his letter dated March 8, 1952,
was in fact a continuance of the agreement, and therefore, this
exemption must be deemed to have been granted under an agreement with the Ruler, within the meaning of 1962 Order. We are
unable to accede to this contention. In our opinion, the Expla
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nation inserted by 1962 Order has no bearing on the facts of this
case. The exemption granted by the Central Government is
granted under para 15 of the Merged States (Taxation Concessions) Order, 1949, which was itself issued under s. 60A of the
Act. The result is that the exemption was granted under the Act
and not under any agreement. The case of the assessee must be G
determined with reference to s. 10(5)(b) of the Act, unaffected
by the amendment made by the 1962 Order.
In the result we agree with the High Court that the answer
to the question referred to should be in the affirmative. The
appeal fails and is dismissed with costs.
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_Appeal dismissed._
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(I) [1966] 2 ~~S.C.R.~~ ~~881.~~
