COMMISSIONER OF INCOME-TAX, MADHYA PRADESH ETC. . vs. M/S. STRAW PRODUCTS LTD., BHOPAL

CIVIL APPEAL No. 893/1964Supreme Court[1966] 2 S.C.R. 88103 December 1965Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI10 pages
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What were the facts?

The respondent company, incorporated in 1939 in the erstwhile State of Bhopal, was exempted from taxation under the Bhopal Income-tax Act for ten years ending October 31, 1948. Following the merger of Bhopal with India in 1949, the company became subject to the Indian Income-tax Act, 1922. The Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, stipulated that depreciation 'actually allowed' under the merged State's law should be considered. Initially, the Income-tax Officer allowed depreciation on the original cost for assessment years 1952-53 and 1953-54. However, upon noticing the Dharangdhara Chemical Works Ltd. decision, the officer recomputed depreciation, considering what would have been allowed under the Bhopal Income-tax Act had the company not been exempted. The Appellate Assistant Commissioner reversed this, holding that depreciation never allowed could not be considered. The Tribunal and High Court agreed. Subsequently, the Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962, added an Explanation to Paragraph 2, retrospectively defining 'depreciation actually allowed' to include depreciation that would have been allowed if income hadn't been exempted.

What did the Supreme Court hold?

The Supreme Court held that the High Court was correct in its initial view that 'actually allowed' in the 1949 Order unambiguously meant depreciation that was actually given effect to. However, the Court found that the Explanation added by the 1962 Order retrospectively changed the meaning of 'actually allowed' and that the Revenue was entitled to rely on this amendment. Applying the 1962 Order, the Court determined that the basis adopted by the Income-tax Officer for computing the written down value of depreciable assets was correct. The Court also ruled that the 1962 Order could be considered as the question referred to the High Court was of sufficient amplitude to include discussion of retrospectively amended laws. The respondent's arguments that the 1962 Order was ultra vires, did not apply because they were not an 'assessee', or was not retrospective were rejected. The Court allowed the appeals, setting aside the High Court's judgment and answering the reference in favour of the Revenue.

What were the issues?

1. Whether the expression 'actually allowed under any laws or rules of a merged State' in Paragraph 2 of the 1949 Order means depreciation that was actually given effect to, or depreciation that was allowable under the provisions of those laws or rules. 2. Whether the 1962 Order, which retrospectively amended the meaning of 'actually allowed' to include depreciation that would have been allowed had income not been exempted, is valid and applicable to the assessment years 1952-53 and 1953-54. Assessee's Contentions: - The respondent company argued that the 1962 Order was being raised for the first time and should not be considered, or alternatively, that it was ultra vires. - It was argued that the 1962 Order did not apply as the company was not an 'assessee' under the Bhopal Act because no tax was payable due to the agreement. - The company contended that the 1962 Order was not retrospective and did not apply to assessments made before its enforcement. Revenue's Contentions: - The Revenue contended that 'actually allowed' meant depreciation allowable under the relevant laws or rules. - The Revenue argued that the 1962 Order, with its retrospective clause 'shall be deemed always to have meant', validated the Income-tax Officer's order.

Which sections of the Income-tax Act were involved?

Section 66(1)

AI-generated summary — verify with the full judgment below

A • B • c D , E F G ' H COMMISSIONER OF INCOME-TAX, MADHYA" PRADESH ETC . v. M/S. STRAW PRODUCTS LTD., BHOPAL December 3, 1965 [K. SUBBA RAo, J. C. SHAH ANDS. M. Sil\RI, JJ.] 88 1 Taxation Laws (Merged States Removal of Difficulties) Order, 1949 Paragraph 2 as amended by Taxation Laws (Merged States) (Removaf of Difficulties) (Amendment) Order l'i62-Explanation added to Para- g'rcph 2-Meaning of term "depreciation actually allott',ed" retrospective ly amended by Explanation-Effect and validity of 1962 Order.

The respondent company, incorporated in 1939 in the erstwhile State of Bhopal, was exempted under an agreement with the Ruler from taxa- tion under the Bhopal Income-tax Act for a period of ten years which ended on October 31, 1948. After the merger of the State with India in 1949 the company became liable to assessment under the Indian Income-tax Act, 1922. The Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949 provided in Paragraph 2 that in computing depreciation allowance all depreciation "actually allowed" under the rele- vant law of a merged State shall be taken into account. Accordingly the Income-tax Officer in making ass

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