The Commissioner of Income Tax, Hyderabad vs Dewan Bahadur Ramgopal Mills Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 5 of 1959

Decision Date: 8 November, 1960

Coram: S.K. Das, M. Hidayatullah, K.C. Das Gupta, J.C. Shah, N. Rajagopala Ayyangar

The case titled The Commissioner of Income‑Tax, Hyderabad versus Dewan Bahadur Ramgopal Mills Ltd was decided on 8 November 1960 by the Supreme Court of India. The report of the decision was prepared by S K Das, and the bench that heard the matter consisted of S K Das, M Hidayatullah, K C Das Gupta, J C Shah and N Rajagopala Ayyangar. The petitioner was the Commissioner of Income‑Tax for Hyderabad and the respondent was the corporate entity Dewan Bahadur Ramgopal Mills Ltd. The judgment was rendered on the 8th day of November 1960, and the same bench composition is recorded again in the official report. The decision is cited as 1961 AIR 338 and also appears in the 1961 Supreme Court Reports (Second Series) at page 318. Various citator references are listed, including MV 1966 SC1026 (2,16), R 1967 SC 266 (15), F 1968 SC 162 (18), E 1968 SC 579 (15), E 1975 SC 797 (2,3,5,7,30,57,60,62), F 1989 SC 1719 (6,7,10,16,17,18,19,20), and RF 1992 SC 1782 (10). The statutes and legal provisions that formed the core of the dispute were the provisions dealing with income‑tax depreciation allowance and the computation of written‑down value, the Hyderabad Income‑tax law that was repealed and replaced by the Indian Income‑tax Act, the Central Government’s notification intended to remove difficulties in the extended law, questions of the validity and retrospective effect of that notification, and the Taxation Laws (Part B States) (Removal of Difficulties) Order 1950, paragraph 2, including its explanation. Relevant sections of the Finance Act 1950—sections 3, 12 and 13—and Article 14 of the Constitution of India were also mentioned. The headnote explains that before the Union of India absorbed the former State of Hyderabad on 26 January 1950, the respondent company had been assessed for income‑tax under the Hyderabad Income‑tax Act. Under that Act the company was allowed a depreciation allowance calculated on the basis of the written‑down value of its assets, such as buildings, machinery and plants, in accordance with clause (C) of section 12(5). That clause provided that for assets acquired before the previous year and before the commencement of the Act, the written‑down value would be the actual cost to the assessee reduced by (i) depreciation at the rates applicable to the assets calculated on the actual costs for the first year since acquisition, then for the next year on the actual cost diminished by the depreciation allowance for one year, and so on for each year up to the commencement of the Act, and (ii) depreciation actually allowed to the assessee on such assets for each financial year after the commencement of the Act. After Hyderabad merged with the Union, sections 3 and 13 of the Finance Act 1950 repealed the tax laws that had been in force in the State and extended the Indian Income‑tax Act 1922 to that territory. Exercising the power conferred by section 12 of the Finance Act 1950, the Central Government issued a notification on 2 December 1950 called the Taxation Laws (Part B States) (Removal of Difficulties) Order 1950. Paragraph 2 of that Order provided that, in making any assessment under the Indian Income‑tax Act 1922, all depreciation actually allowed under any laws or rules of a Part B State shall be taken into account in computing the aggregate depreciation allowance referred to in proviso (c) to section 10(2)(vi) and the written‑down value under section 10(5)(b) of that Act. For

In the assessment year 1951‑52 the respondent was assessed for the first time under the Indian Income‑tax Act. Relying on paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order 1950, the respondent claimed the original cost of the assets at their inception and requested that the depreciation already allowed for the three assessment years during which it had been assessed under the Hyderabad Income‑tax Act be deducted from that cost. By an order dated 30 November 1951 the Income‑tax Officer rejected the respondent’s claim, holding that the claim contradicted the principle that depreciation allowances must decline from year to year. The dispute was taken to the Supreme Court, and while the case was pending, the Central Government issued a notification on 8 May 1956 under the powers conferred by section 12 of the Finance Act 1950. The notification added an explanation to paragraph 2, stating that the expression “all depreciation actually allowed under any laws or rules of a Part B State” shall be deemed to mean the aggregate depreciation allowance taken into account in computing the written‑down value under any such law or rule, or carried forward under the same law or rule.

The respondent challenged the validity of the 1956 notification and its applicability to the present case on three grounds: first, that the notification was ultra vires the authority granted to the Central Government by section 12 of the Finance Act 1950; second, that it violated Article 14 of the Constitution; and third, that it could not have retrospective effect. The Court held that the true scope of section 12 was to empower the Central Government to determine whether a difficulty of the kind described in the provision had arisen and, if so, to issue an order or direction deemed necessary to remove that difficulty, a power left to the executive by the legislature. Relying on Pandit Banarsi Das Bhanot v The State of Madhya Pradesh and Others, [1959] S.C.R. 427, the Court observed that a difficulty had indeed arisen: if depreciation allowed under the Hyderabad Income‑tax Act were taken into account in computing the aggregate depreciation allowance and the written‑down value, the result would be anomalous, because the depreciation allowance permitted under the Indian Income‑tax Act for the accounting year would exceed the allowance permitted in preceding years under the Hyderabad Act. Accordingly, the Central Government acted within its authority under section 12 in issuing the 8 May 1956 notification. The Court further concluded that the 1956 notification applied to all persons to whom paragraph 2 of the 1950 Order was applicable, thereby ensuring equal treatment of persons in similar situations and not violating Article 14 of the Constitution.

In this matter, the Court examined whether the Central Government possessed the authority under section 12 of the Finance Act 1950 to issue an order or direction intended to remove difficulties that arose at the very beginning of the implementation of the new law. The Court held that such power indeed existed and, consequently, a notification issued in 1956 – although it was added after the earlier years – was deemed to be valid. The Court further concluded that the 1956 notification could be applied to assessments made for the financial year 1951‑52. This conclusion was drawn on the basis of the constitutional provision that permits the executive to address problems that emerge during the initial phase of a statutory scheme.

The appeal arose in Civil Appeal No 5 of 1959, which challenged a judgment and order dated 16 February 1954 delivered by the former Hyderabad High Court in Reference No 347/B‑5/2 of 1953‑54. The appellant, the Commissioner of Income‑Tax, Hyderabad, was represented by the solicitor‑general of India together with counsel for the appellant. The respondent, Dewan Bahadur Ramgopal Mills Ltd., a public limited company incorporated in the former State of Hyderabad, was represented by counsel for the respondent. The judgment, pronounced on 8 November 1960 by Justice S K Das, concerned a certificate of fitness that had been granted by the High Court of Judicature at Hyderabad pursuant to section 66‑A(2) of the Indian Income‑Tax Act 1922.

The respondent company had previously been assessed under the Hyderabad Income‑Tax Act for the assessment years 1357‑F, 1358‑F and 1359‑F. In each of those years, depreciation allowance was allowed based on the written‑down value of its assets – including buildings, machinery and plant – in accordance with clause (c) of section 12(5) of the Hyderabad Income‑Tax Act. That clause specified that for assets acquired before the previous year and before the commencement of the Act, the written‑down value would be calculated as the actual cost to the assessee reduced by two components: (i) depreciation calculated at the rates applicable to the assets, applied first to the actual cost for the year of acquisition and subsequently to the reduced cost after each year’s depreciation up to the commencement of the Act; and (ii) depreciation that had actually been allowed to the assessee for each financial year after the Act commenced.

The State of Hyderabad had merged with the Union of India on 26 January 1950, becoming a Part B State. By virtue of section 13 of the Finance Act 1950, the taxation statutes of Part B States were repealed, except for limited purposes not relevant here, while section 3 extended the Indian Income‑Tax Act 1922 to the whole of India, excluding Jammu and Kashmir. Exercising the authority conferred by section 12 of the Finance Act 1950, the Central Government issued the Taxation Laws (Part B States) (Removal of Difficulties) Order 1950, announced by a notification dated 2 December 1950. Paragraph 2 of that Order, which is pertinent to the present case, provided that in making any assessment under the Indian Income‑Tax Act 1922, all depreciation actually allowed under any law or rule of a Part B State relating to income tax, super‑tax or tax on profits of business must be taken into account when computing the aggregate depreciation allowance and the written‑down value as prescribed by the Indian Act.

In this case, the Court recorded that the Removal of Difficulties Order of 1950 contained a provision stating that, for the purpose of making any assessment under the Indian Income‑tax Act of 1922, “all depreciation actually allowed under any laws or rules of a Part B State, relating to Income‑tax and Super‑tax, or any law relating to tax on profits of business, shall be taken into account in computing the aggregate depreciation allowance referred to in sub‑clause (c) of the proviso to clause (vi) of sub‑section (2) and the written down value under clause (b) of sub‑section (5) of sec. 10 of the said Act.” For the assessment year 1951‑52, which corresponded to the account year ending 30 June 1950, the respondent was assessed for the first time under the Indian Income‑tax Act of 1922 together with paragraph 5 of the Part B States (Taxation Concessions) Order, 1950. Relying on paragraph 2 of the Removal of Difficulties Order, the respondent claimed a depreciation allowance on its assets—including buildings, machinery and plant—amounting to Rs 8,12,244. To determine this amount, the respondent computed the original cost of the assets, subtracted the depreciation that had been allowed for the three assessment years when it had been assessed under the Hyderabad Income‑tax Act, arrived at a written down value, and then applied the prescribed depreciation rates to that value. By an order dated 30 November 1951, the Income‑tax Officer rejected the claim. The officer reasoned that the respondent’s claim conflicted with the principle that depreciation allowance must decline from year to year, and that the word “allowed” in paragraph 2 of the Removal of Difficulties Order should be interpreted to mean merely “considered”. Consequently, the officer used the written down values recorded in the income‑tax proceedings of 1359‑F and allowed depreciation on those figures at the statutory rates. The respondent appealed this decision to the Appellate Assistant Commissioner of the Hyderabad Division, who, by an order dated 23 May 1952, affirmed the Income‑tax Officer’s view and dismissed the appeal. The matter was then taken to the Income‑tax Appellate Tribunal, where the Bombay Bench heard the case. In its order dated 12 December 1952, the Tribunal held that, in view of paragraph 2 of the Removal of Difficulties Order, the respondent’s contention must prevail. The Tribunal observed that the language of paragraph 2 expressly referred to “depreciation actually allowed under any laws or rules of a Part B State” and that this phrase did not denote the aggregate depreciation allowance used to compute the written down value under the Hyderabad Act. Therefore, the Tribunal concluded that the respondent was entitled to the depreciation allowance it had claimed. The Tribunal directed the Income‑tax Officer to recompute the written down value of the assets by taking the actual cost incurred by the assessee and deducting the depreciation actually allowed under the Hyderabad Income‑tax Act.

In this case the appellant sought a reference of the matter to the High Court under section 66(1) of the Indian Income‑tax Act. While the reference was pending, the Central Government, claiming authority under section 60‑A of the Indian Income‑tax Act, 1922, issued a notification on 9 March 1953 that added an Explanation to paragraph 2 of the Removal of Difficulties Order, 1950. The Explanation stated that, for the purpose of that paragraph, the expression “all depreciation actually allowed under any laws or rules of a Part B State” should be interpreted to mean the aggregate allowance for depreciation that is taken into account in computing the written‑down value under any such laws or rules, or that is carried forward under those laws or rules. By giving this meaning, the Explanation adopted the Department’s position that the amount to be allowed must be the total depreciation taken into account in the written‑down value as computed under the relevant law of a Part B State.

The appellant, relying on this Explanation, argued that the respondent could not claim a depreciation allowance calculated on the basis of the actual cost of the assets diminished by the depreciation allowances actually permitted under the Hyderabad Income‑tax Act. The Appellate Tribunal considered the application for a reference and expressed the view that, if the Explanation were applicable to the present case, the Department’s contention would be correct and should be upheld. However, the Tribunal asserted that it lacked the power to review its own order and consequently chose not to express any opinion on whether the Explanation was valid or whether it affected the case before it. The Tribunal nevertheless identified a precise question of law arising from its order and framed it as follows: “Whether, in making the assessment for the year 1951‑52 under the Indian Income‑tax Act, the assessee company is entitled to claim depreciation allowance on the basis of the written‑down value computed at the time of the assessment for the year 1359‑F, or whether the allowance must be computed on the basis of the actual cost minus the depreciation allowances granted under the Hyderabad Income‑tax Act?”

The reference was subsequently heard by the High Court of Judicature at Hyderabad. By an order dated 16 February 1954, the High Court held that the Explanation appended to paragraph 2 of the Removal of Difficulties Order, 1950, by the notification of 9 March 1953 was void. One of the grounds for this conclusion was that the Explanation exceeded the powers conferred on the Central Government by section 60‑A of the Indian Income‑tax Act, rendering it ultra vires. Accordingly, the High Court answered the question of law in favour of the respondent. After obtaining the requisite certificate of fitness, the appellant then preferred the present appeal. In the interval, a further legislative change occurred when, on 8 May 1956, the Central Government issued a new notification under a different statutory provision.

In this case the Central Government issued Notification number S. R. O. 1139, exercising the authority granted by section 12 of the Finance Act, 1950, and dated the notification May 8, 1956. The notification inserted an Explanation into paragraph 2 of the Removal of Difficulties Order, 1950, and the wording of the newly added Explanation was identical to the Explanation that had previously been inserted under section 60‑A of the Indian Income‑tax Act. The arguments presented before the Court were based on the validity and effect of this newly added Explanation and both parties agreed that if the Explanation were held to be valid and applicable to the facts of the present appeal, the appeal would have to be allowed and the legal question would be answered in favour of the appellant. Conversely, both parties agreed that if the Explanation were invalid or did not apply, the appeal would have to be dismissed. The Court therefore set out to examine in detail the various contentions raised by the appellant and the respondent.

The Court first read the text of section 12 of the Finance Act, 1950, which authorises the Central Government to make an order whenever a difficulty arises in giving effect to the provisions of any Act, rule or order that has been extended to a State or a merged territory by section 3 or section 11. Section 12 provides that the Government may, by such order, make any provision or give any direction it considers necessary to remove the difficulty. On behalf of the appellant it was submitted that the notification of May 8, 1956, was issued within the scope of the power conferred by section 12, that it did not suffer from any of the defects identified by the High Court in the earlier 1953 notification made under section 60‑A, and that the Explanation added by the notification gave effect to the appellant’s position. The Court observed that although the textual language of the Explanation was unchanged, the legal foundation for its insertion differed because the earlier instrument relied on section 60‑A whereas the present instrument relied on section 12. Accordingly, the appellant urged that the Court should recognise the change in law introduced by the notification and apply it to answer the legal question arising from the Tribunal’s order.

The respondent, through counsel, vigorously contested both the validity of the notification and its applicability to the present case. The respondent advanced three principal grounds of objection. First, the respondent argued that the notification was ultra vires because it exceeded the powers granted to the Central Government by section 12. Second, the respondent maintained that the notification could not operate retrospectively. Third, the respondent contended that the notification violated article 14 of the Constitution. The Court noted that the respondent’s reliance on the constitutional guarantee of equality required the Government to demonstrate that the notification did not create an arbitrary distinction. The Court indicated that it would consider these points in the order presented.

The initial issue for determination concerned whether the notification was validly made under section 12 or whether it transgressed the limits of the authority granted by that section. The respondent relied on the opening clause of section 12, which conditions the exercise of the power upon the existence of a difficulty in giving effect to the provisions of any Act, rule or order that has been extended to a State or merged territory. The respondent asserted that no such difficulty had arisen, and therefore the condition precedent for invoking the power under section 12 was not satisfied, rendering the notification invalid. The Court proceeded to analyse each of these arguments in turn.

In this case the respondent argued that the opening clause of the notification required a difficulty to have arisen in giving effect to any Act, rule or order extended by section 3 or section II to any State, and that no such difficulty had occurred; consequently, the respondent claimed that the condition for exercising the power under section 12 was not satisfied and that the notification was therefore invalid. The Court rejected this contention, stating that it could not be accepted as correct. The Court then turned to the provisions of section 10 of the Income‑Tax Act, which in its first subsection provided that tax was payable by an assessee on the profits or gains of any business, profession or vocation carried on by him. Sub‑section (2) required that such profits or gains be computed after making certain allowances, one of which, clause vi, concerned depreciation of buildings, machinery, plant and other assets used for the purpose of the business. The Court noted that, except in certain cases, depreciation was calculated on the written‑down value, a term explained in sub‑section (5) of section 10. In clause (b) of that sub‑section, the provision stipulated that for assets acquired before the previous year the written‑down value was to be determined by subtracting from the actual cost all depreciation actually allowed to the assessee under this Act, any Act repealed thereby, or under executive orders issued when the Indian Income‑Tax Act, 1886 (Act 11 of 1886), was in force.

The Court observed that applying clause (b) to an assessee in a Part B State created an initial difficulty because, prior to 1950, when the Indian Income‑Tax Act came into force in a Part B State, no depreciation could have been actually allowed to such an assessee under the Income‑Tax Act or any repealed Act. For example, the Hyderabad Income‑Tax Act had been repealed by the Finance Act 1950 and not by the Income‑Tax Act, and therefore it was not covered by clause (b). This and similar difficulties led to the issuance of the Removal of Difficulties Order 1950, an order that had not been seriously challenged before this Court. The Court further noted that the High Court had held that the respondent could not challenge the validity of the Removal of Difficulties Order 1950 because that issue had not been raised before the Tribunal. The respondent then submitted that any initial difficulty in giving effect to the Indian Income‑Tax Act in a Part B State had been resolved by paragraph 2 of the Removal of Difficulties Order 1950 and that there was no new difficulty that would justify the addition of an Explanation in 1953 or 1956. The Court found this argument unpersuasive. It explained that the basic and normal scheme of depreciation under the Indian Income‑Tax Act required depreciation to decrease each year, being a percentage of the written‑down value, which in the first year equaled the actual cost and, in subsequent years, equaled the actual cost less all depreciation actually allowed under the Income‑Tax Act or any repealed Act. This scheme underscored the necessity of addressing the difficulty identified in Part B States.

In calculating depreciation, the first‑year basis is the actual cost of the asset, and in each subsequent year the basis is the actual cost reduced by all depreciation that has actually been allowed under the Income‑tax Act or under any Act that has subsequently repealed it. The Hyderabad Income‑tax Act, however, was not repealed by the Indian Income‑tax Act but by the Finance Act of 1950, and this created a difficulty in permitting depreciation to a taxpayer situated in a Part B State for the first assessment year that fell under the Indian Income‑tax Act. Paragraph 2 of the Removal of Difficulties Order, 1950, was intended to remove that difficulty by providing a procedural rule for such cases. If, nevertheless, the depreciation that had been allowed under the Hyderabad Income‑tax Act were taken into account when computing the aggregate depreciation allowance and the written‑down value, an anomalous result would arise, as it did in the present matter, whereby the depreciation allowance to be granted for the accounting year under the Indian Income‑tax Act would exceed the amount that had been allowed in earlier years under the Hyderabad Act. Such an outcome would produce a disparity that would be contrary to the scheme of the Indian Income‑tax Act. Consequently, it became necessary to give a clear explanation of paragraph 2 of the Removal of Difficulties Order, 1950, so as to harmonise the treatment of depreciation allowances, and the Explanation that was added in 1953 and again in 1956 was evidently intended to remove the difficulty created by that disparity. Moreover, the true scope of section 12 appears to be that the Central Government alone may determine whether a difficulty of the kind described in the section has arisen and may then issue an order or direction that it deems necessary to eliminate the difficulty. Parliament therefore entrusted this function to the executive, and that delegation does not render the 1956 notification invalid. In the decision of Pandit Banarsi Das Bhanot v. State of Madhya Pradesh & Ors., the Court observed that it is not unconstitutional for the legislature to leave to the executive the determination of details relating to the operation of tax laws, such as the identification of persons liable to tax and the rates to be applied to different classes of goods. On this basis, the Court held that the notification issued in 1956 was validly made under section 12 and was not ultra vires of the powers conferred on the Central Government by that provision. The second issue for determination was whether that 1956 notification applied to the assessment presently before the Court, which concerned the assessment year 1951‑52. Although the notification was issued in 1956, it added an Explanation to paragraph 2 of the Removal of Difficulties Order, 1950, stating that a specific expression occurring in that paragraph shall always be deemed to mean the aggregate allowance for depreciation taken into account in computing the written‑down value, and similar calculations, under any law of a Part B State. The respondent argued that the law governing the 1951‑52 assessment should be the law that was in force when the Finance Act, 1951, came into effect, and therefore the original wording of paragraph 2 as it stood on 28 April 1951 should apply.

The respondent argued that the law governing the assessment for the year 1951‑52 was the law that existed when the Finance Act of 1951 became operative; consequently, the respondent contended that paragraph 2 of the Removal of Difficulties Order, 1950, as it stood on 28 April 1951, should control the present assessment. The Court found this argument unsound. It observed that the Explanation added in 1956 clarified the meaning of paragraph 2 of the Removal of Difficulties Order, 1950, and expressly stated that the paragraph must be deemed to have always possessed that meaning. Section 12, by its very intent and purpose, conferred on the Central Government the power to issue an order removing a difficulty that had already arisen, and the power to remove such difficulty necessarily included the authority to retroactively eliminate the difficulty from the time it originated. Accordingly, the Court held that the Central Government possessed the power to make an order or give a direction that removed the difficulty from its inception, and that the 1956 notification performed exactly that function. The Court further concluded that the 1956 notification applied to the assessment of 1951‑52 and, in fact, applied to every assessment made under the Indian Income‑tax Act in which paragraph 2 of the Removal of Difficulties Order, 1950, operated.

The final challenge to the validity of the 1956 notification was that it allegedly violated Article 14 of the Constitution by discriminating between different classes of taxpayers. The respondent’s counsel invited the Court to consider three hypothetical categories of assessors that later became part of a Part B State: (i) a region where no income‑tax law existed, (ii) a region where an income‑tax law computed written‑down value on the basis of depreciation actually allowed each year, and (iii) a region where the written‑down value was computed according to the Hyderabad Income‑tax Act. The counsel noted that, upon extending the Indian Income‑tax Act – read with paragraph 2 of the Removal of Difficulties Order, 1950, and the Explanation – to these areas, the assessor in the first region would receive a depreciation allowance on the actual cost, the assessor in the second region would receive an allowance equal to actual cost less depreciation actually allowed, and the assessor in the third region would receive an allowance equal to actual cost less depreciation taken into account. The counsel argued that this outcome produced arbitrary discrimination lacking rational justification. The Court rejected this submission, observing that the counsel had ignored a crucial consideration: the three assessors did not occupy the same position, and therefore were not entitled to identical treatment. It was evident, the Court held, that an assessor from a region with no prior income‑tax law could not be placed on a par with an assessor from a region where a distinct depreciation regime had previously operated. Consequently, the Court found the challenge based on Article 14 to be without substance.

The Court observed that a person residing in a territory where no income‑tax legislation existed cannot be regarded as equal to a person in a territory where legislation permitted depreciation on buildings, machinery or plant. Likewise, where the earlier law governing depreciation differed from that of another area, the persons situated in those respective areas cannot be treated as being on the same footing for purposes of depreciation allowance. To apply identical treatment to all such persons would, in effect, constitute unequal treatment, because the relevant legal environments are not comparable. The Court therefore held that the 1956 notification does not create any discrimination among persons who are in a similar position, since it is applicable uniformly to everyone to whom paragraph two of the Removal of Difficulties Order, 1950, is relevant. Consequently, the challenge to the 1956 notification on the ground of violation of Article fourteen was deemed to be entirely without merit. The Court noted that it is a settled principle that a law validly amended and applicable to a matter still pending on appeal must be taken into account and given effect by the appellate tribunal. On that basis, the Court concluded that the 1956 notification was lawfully issued and governs the present dispute. Because that conclusion resolves the essential issue, the Court found it unnecessary to revisit the 1953 notification or to examine the reasons why the High Court had previously declared that earlier notification invalid. Accordingly, the Court allowed the appeal, set aside the High Court’s judgment and order dated 16 February 1954, and answered the question referred to the High Court in favour of the appellant. The appellant succeeded precisely because of the effect of the 1956 notification, and the Court directed that no costs be awarded for the hearing before this Court.