STRAW PRODUCTS LTD. vs. INCOME-TAX OFFICER, BHOPAL & ORS.

CIVIL APPEAL No. 303/1967Supreme Court[1968] 2 S.C.R. 120 October 1967Bench: 7 JudgesAuthor: K.N. WANCHOO, M. HIDAYATULLAH, J.C. SHAH, R.S. BACHAWAT, V. RAMASWAMI, G.K. MITTER, K.S. HEGDE B13 pages
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What did the Supreme Court hold?

The Supreme Court held that the power under Section 6 of Act 67 of 1949 is conditional upon the existence of a genuine difficulty in giving effect to the provisions of the extended Act, rule, or order. This difficulty must be an objective fact, not a subjective satisfaction of the government. The Court found that the 1962 Order, particularly clause (b) of its Explanation, was invalid because no such difficulty had arisen. The fact that courts had not accepted the department's contention for notional depreciation in exempted cases was not a difficulty justifying the use of Section 6 powers. The Court also clarified that Section 10(5)(b) is a definition clause and does not prevent the determination of written-down value. The appeal was allowed, and the impugned clause of the 1962 Order was declared ultra vires, with revenue authorities barred from levying tax based on depreciation computed under it. The Court did not decide on other contentions regarding Section 298 of the 1961 Act or equality before the law.

What were the facts?

The appellant company, Straw Products Ltd., was incorporated in Bhopal State in 1937 and was exempted from all taxes until October 31, 1948. Bhopal State merged with India on August 1, 1949. The Indian Income-tax Act, 1922, was extended to merged states, with the Central Government empowered to issue orders to remove difficulties in its application. The Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, was issued, and later amended in 1962 with an Explanation. Clause (b) of this Explanation provided that for assessees exempted from tax in merged states, notional depreciation would be deemed to have been allowed for computing written-down value. The Income-tax Officer, after issuing a notice under Section 34, recomputed the taxable income on this notional depreciation basis. The appellant challenged this, and the High Court dismissed their writ petition. The Supreme Court heard the appeal.

What were the issues?

1. Whether the Central Government's power under Section 6 of the Taxation Laws (Extension to Merged States and Amendment) Act, 67 of 1949, to remove difficulties in applying the Indian Income-tax Act to merged states was validly exercised by the Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, 1962, specifically clause (b) of its Explanation. Assessee's Contention: The assessee argued that the 1962 Order, by deeming notional depreciation as 'actually allowed' for exempted income, went beyond the scope of Section 6. They contended that no actual difficulty in applying the Act had arisen that warranted such an order, and the department's inability to collect tax due to exemption was not a 'difficulty' in the sense contemplated by the provision. Revenue's Contention: The revenue argued that a difficulty arose in determining the written-down value of assets under Section 10(5)(b) of the Indian Income-tax Act, 1922, for assessees who were not previously subject to the Indian Act. They contended that the impugned order was necessary to resolve this administrative difficulty in applying the Act to merged states.

Which sections of the Income-tax Act were involved?

Section 6,Section 10(2)(vi),Section 10(5)(b),Section 34,Section 298

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A B c D E F G H ' STRAW PRODUCTS LTD. v. INCOME-TAX OFFI~ER, BHOPAL & ORS. '

October 20, 1967 [K. N. WANcHoo, c.J., M. HrnAYATULLAH; -J:-e:--sa\tt, R. S. BACHAWAT, V. R/iMASWAMl, G. K. M!TTE 0 R AND K. S. HEGDE, JJ.)

Taxation Laws (Extension, to Merged .States 1/11d A111end11ien1) 4,., 67 of 1949, s. 6--PO\\'er give11 to Ct•ntral Gover11111l'lll tu pass approprh11£• orders in order to ren1ovc dif]ic11lries in the llpp/ication of the /11dia11 111co1ne-tax Act, 19:22 to 111erged States-Nature of 1/ifficulties ~,·/tic:// j11.stify s11cli order-Ttixatiod Lent'.~ (Merged States) (R<•n1ova/ of Di/Jic11l- ries) Aniend111e11t 'Order, 1962--0rrfer -prescribing that in the case: v) assessees exen1pred fro11l paying tax by ltnv or .1,r.,•rt'e111e11t in nu!rged Stc11es notional dt•preciation on assets to 'be taken into <1cco1u1( in con1p11ti11g 1vrirre11 ·do\,.,, value-Va/i(!ity Qj Order.

The appellant company was formed in 1937 in Bhopal State and was exempted by the Ruler of that State from payment of nil taxes till Octo- ber 31, 1948. The State of Bhopal merged with India on August!, 1949. Ordinance 21 of 1949 and the ·'Taxation La\\'S (Ex.tension to M

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