COMMISSIONER OF INCOME-TAX, MADHYA PRADESH vs. M/S. NANDLAL BHANDARI MILLS LTD.

CIVIL APPEAL No. 629/1964Supreme Court[1966] 2 S.C.R. 92507 December 1965Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI B19 pages
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What were the facts?

The respondent, M/s. Nandlal Bhandari Mills Ltd., was assessed under Indore Industrial Rules and the Indian Income-tax Act, 1922, prior to 1950. Depreciation was allowed under both. For assessment year 1950-51 onwards, the written down value (WDV) of assets was determined under the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950. This Order stipulated that if depreciation was allowed in both Part B States and taxable territories, the greater of the two sums would be taken into account. The Income-tax Officer calculated WDV using Indian Act depreciation up to 1944 and Indore Rules thereafter. For the period up to 1944, the respondent was treated as a non-resident, and its Indian income was computed under Rule 33 as a fraction of its total world income. The full depreciation allowed against total world income was used by the ITO for WDV. The respondent argued only a fraction of depreciation should be considered as 'actually allowed' against Indian income.

What did the Supreme Court hold?

The Supreme Court, by a majority (Subba Rao and Sikri, JJ.), held that the High Court's view was correct. The Court reasoned that the expression 'actually allowed' in paragraph 2 of the Removal of Difficulties Order refers to the depreciation actually allowed under the Income-tax Act or the laws of Part B States. Under the Income-tax Act, depreciation allowance is granted in respect of assets used in the business and is calculated on the written down value. This allowance is conditioned on the user of the assets and contributes to earning income. Even though the assessee was taxed as a non-resident on a fraction of its profits under Rule 33, which involved calculating Indian income as a proportion of total profits, the full amount of depreciation was deducted from the world income to arrive at total profits before the proportion was struck. The Court clarified that the mere fact that a fraction of the total income was taxable did not mean only a fraction of the depreciation was 'actually allowed'. The Income-tax Officer could have adopted a different method, but whatever method was used, only a fraction of the total depreciation was effectively allowed in ascertaining the taxable income in India. The judgment endorsed the principle laid down in Hakumchand Mills Ltd. v. Commissioner of Income-tax (Central) Bombay. Justice Shah, in his dissenting opinion, argued that depreciation, once allowed in computing total profits, does not survive as a separate head, and there is no definable relation between taxable profits (a fraction of total profits) and depreciation. He believed the full depreciation allowed should be taken into account.

What were the issues?

1. Whether, for the purpose of computing the written down value of assets under paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, the amount of depreciation 'actually allowed' against the total world income of a non-resident assessee should be the full amount or only the fraction attributable to the taxable income in India. Assessee's contention: The assessee argued that since only a fraction of its total world income was treated as taxable income in India, only a corresponding fraction of the depreciation allowed against the world income should be considered as 'actually allowed' for the purpose of computing the written down value, as per the proviso to paragraph 2 of the Removal of Difficulties Order. They relied on the method of computation under Rule 33 of the Indian Income-tax Act, 1922. Revenue's contention: The revenue contended that depreciation is allowed in respect of the use of assets in business and its allowance does not depend on the assessable income. Therefore, the High Court erred in striking a proportion of depreciation based on a fraction of the income assessed under the Indian Income-tax Act. They argued that the full amount of depreciation allowed should be taken into account.

Which sections of the Income-tax Act were involved?

Section 4(1)(a),Section 4(1)(c),Section 42,Section 10,Section 10(2)(vi),Section 14(2)(c),Section 4A(c)

AI-generated summary — verify with the full judgment below

A B c D ' • G H COMMISSIONER OF INCOME-TAX, MADHYA PRADESH v. M/S. NANDLAL BHANDARI MILLS LTD.

December 7, 1965 [K. SUBBA RAo, J. C. SHAH AND S. M. SIKRI, JJ.] Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, Para 2, proviso-Depreciation allowed to non .. resident company in Part B States as well as in India-Fraction of total world income taken as Indian income-Depreciation allowed against total world income whether depreciation 'actually allowed' against Indian income-Computation of written down value after 1950. In the years prior to 1950 the respondent company with headquarters in the erstwhile state of Indore was assessed to tax under the Indore In- dustrial Rules, 1927 and also under the Indian Income-tax Act, 1922 in so far as its income fell with:n ss. 4(1)(a) and 4(1)(c) read withs. 42 of the Act.

Depreciation had been allowed to it under the Indore In- dustrial Rules as we!! as the Indian Act.

The written down value of its assets for the purpose of 1950-51 and subsequent assessments had to be determined under the Taxation Laws (Part B States) (Removal of DUii. culties) Order, 1950 wh'ch laid down in the proviso to paragraph

The order continues below.

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