The Mahalaxmi Mills Ltd vs The Commissioner of Income Tax, Bombay

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

Court: supreme-court

Case Number: Civil Appeals Nos. 599-602 of 1962

Decision Date: 08/04/1960

Coram: Das Gupta

The case was titled The Mahalaxmi Mills Ltd versus The Commissioner of Income‑Tax, Bombay and was decided by a Bench of the Supreme Court of India on the eighth day of April, 1960. The petitioner in the proceeding was The Mahalaxmi Mills Ltd and the respondent was the Commissioner of Income‑Tax, Bombay, together with connected appeals. The judgment concerned the provisions of the Income‑Tax Act relating to depreciation, the computation of the written down value of assets, and the deduction of depreciation in earlier years. The statutory framework involved the Saurashtra Income‑Tax Ordinance, 1949, section 13(5)(b); the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, paragraph 2; and the Indian Income‑Tax Act, 1922 (Eleventh of 1922), section 10(5)(b).

In the factual background, the assessee companies were carrying on business in the former Indian State of Bhavnagar. In 1948 Bhavnagar merged into the United State of Saurashtra, and on 16 March 1949 the Saurashtra Income‑Tax Ordinance was promulgated. For the purpose of calculating the depreciation allowance to which the assessee were entitled in computing the profits or gains of their business, the written down value of buildings, machinery and other assets had to be ascertained in accordance with the provisions of that Ordinance. Section 13(5)(b) of the Ordinance provided that “the written down value meant, in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Ordinance or … which would have been allowed to him if the Indian Income‑Tax Act, 1922, was in force in the past.” For the assessment year 1949‑50, the assets of the assessee had indeed been acquired before the previous year. Accordingly, the Income‑Tax Officer, in determining the written down value, deducted the amount of depreciation that would have been allowable under the Indian Income‑Tax Act, 1922, had that Act been in force and had a claim been made supported by the prescribed particulars. The assessee contested this deduction, arguing that the wording of section 13(5)(b) did not empower the Officer to make the deduction because in reality no claim for such allowance had been made or could be made.

For the later assessment year 1951‑52, Saurashtra had become a Part B State of the Union of India and the Indian Income‑Tax Act, 1922, had been extended to that territory. The Income‑Tax Officer therefore applied the provisions of section 10(5)(b) of the Indian Income‑Tax Act, read together with paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, in computing the written down value. In doing so, the Officer deducted not only the depreciation allowed in the assessment year 1950‑51 under the Indian Income‑Tax Act and the depreciation allowed in the assessment year 1949‑50 under the Saurashtra Ordinance, but also the depreciation that had been availed of in earlier years by the assessee under the Bhavnagar War Profits Act. Paragraph 2 of the Removal of Difficulties Order of 1950 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 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 written down value under section 10(5)(b) of the Act.” The assessee contended that this provision could be invoked only when a concrete difficulty was experienced in giving effect to the Act, which they claimed was not the case, and further argued that the Bhavnagar War Profits Act was not a law of a Part B State and therefore paragraph 2 of the Order should not apply.

The removal of difficulties order of 1950 stated that any tax on profits of business shall be taken into account when computing the written‑down value under section 10(5)(b) of the Income‑Tax Act. The assessees argued that the order could be invoked only when a real difficulty was actually encountered in giving effect to the Act, and because no such difficulty had arisen in their cases, the provision should not apply. They also contended that the Bhavnagar War Profits Act was not a law of the Part B State, and therefore paragraph 2 of the order was inapplicable. The Court held, first, that a proper construction of section 13(5)(b) of the Saurashtra Income‑Tax Ordinance shows that the phrase “which would have been allowed to him” means “which should have been allowed if a proper claim had been made.” Consequently, while ascertaining the written‑down value, the depreciation that would have been allowable had the Indian Income‑Tax Act, 1922— which was not in force in the State at the relevant time—been applicable, must be deducted. The earlier authorities Commissioner of Income‑Tax v. Kamala Mills Ltd. [1949] 17 I.T.R. 130 and Rajaratna Naranbhai Mills Ltd. v. Commissioner of Income‑Tax [1950] 18 I.T.R. 122 were distinguished. Second, the Court observed that it is the responsibility of the Central Government to determine whether any difficulty has arisen in the operation of the Indian Income‑Tax Act, 1922, and to issue an order removing such difficulty. Once such an order is issued, it operates according to its own terms, and the Income‑Tax Officer is not required to first examine, in each individual case, whether a difficulty has arisen. Accordingly, paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, was applicable, following the precedent set in Commissioner of Income‑Tax v. Dewan Bahadur Ram Gopal Mills Ltd. [1961] 2 S.C.R. 318. Third, the Court concluded that the Bhavnagar War Profits Act fell within the expression “any law relating to tax on profits of business” in paragraph 2 of the 1950 removal of difficulties order. The judgment then proceeded to outline the civil appellate jurisdiction, noting that civil appeals Nos. 599‑602 of 1962 arose from the Bombay High Court’s judgment and order dated 7 and 8 April 1960 in Income‑Tax References Nos. 70 and 71 of 1956. Counsel for the appellants represented the respondents in all four appeals, while counsel for the respondent appeared for the opposing side. The judgment was delivered by Justice Das Gupta, who explained that the appellant‑assessee in each of the four appeals was the party subject to the assessment, with Mahalaxmi Mills Ltd. filing appeals 599 and 600 and Master Silk Mills Ltd. filing appeals 601 and 602, each arising under section 66(1) of the Indian Income‑Tax Act and referred to the High Court of Bombay.

Appeals numbered 599 and 601 concerned the assessment year 1949‑50, while the remaining two appeals related to the assessment year 1951‑52. In every one of these matters the dispute centered on the method by which the written‑down value should be computed for the purpose of calculating the depreciation allowance. Both appellant‑companies had, prior to the year 1949‑50, been carrying on their business in Bhavnagar, which at that time was a separate Indian State. In 1948 Bhavnagar, together with the other princely states of Kathiawar, united to form a federation called the United States of Kathiawar; subsequently the name of this entity was altered to Saurashtra. On 16 March 1949 the Raj Pramukh of the newly created State promulgated the Saurashtra Income‑Tax Ordinance, 1949. That Ordinance was applicable for only a single fiscal year, namely the assessment year 1949‑50. Consequently, when the Income‑Tax Officer was required to assess the profits of business of the two appellant companies for the year 1949‑50, he was bound to follow the provisions contained in that Ordinance. Section 13(5) of the Ordinance defined the term “written‑down value” as follows: (a) for assets acquired in the preceding year, the actual cost to the assessee; and (b) for assets acquired before the preceding year, the actual cost to the assessee less all depreciation that had actually been allowed to him under the Ordinance, or under any enactment that the Ordinance repealed, or that would have been allowed to him if the Indian Income‑Tax Act, 1922, had been in force in the past. Because the assets of both appellant companies had been acquired before the preceding year, the provision of clause (b) was the one that applied. The Income‑Tax Officer interpreted the words “or which would have been allowed to him if the Indian Income‑Tax Act, 1922, was in force” to mean that, in determining the written‑down value, he should subtract depreciation that would have been permissible under the 1922 Act, assuming that such depreciation could have been claimed and supported by the prescribed particulars. Applying that approach, the officer calculated a deduction of Rs 17,21,041 in the case of Mahalaxmi Mills Ltd., the appellant in appeal 599/62, and a deduction of Rs 2,02,500 in the case of Master Silk Mills Ltd., the appellant in appeal 601/62. The effect of those deductions was to reduce the written‑down value of the assets substantially below the amount that would have resulted if the deduction had not been made, and consequently the depreciation allowance that could be claimed was correspondingly lower. The assessee companies argued that no such deduction should be permitted because the expression “would have been allowed to him if the Indian Income‑Tax Act, 1922, was in force in the past” could not operate to deduct depreciation when no claim for such allowance had actually been made or could be made. That contention was rejected by the Income‑Tax Officer, a view that was subsequently upheld by the Appellate Assistant Commissioner as well as by the Income‑Tax Tribunal.

In contrast to the earlier view, the Appellate Assistant Commissioner and the Income‑Tax Tribunal held that the phrase “or which would have been allowed to him if the Indian Income‑tax Act, 1922, was in force in the past” did not authorize the Income‑tax Officer to deduct any amount under that provision. Consequently, the question of law was referred to the High Court under section 66(1) of the Indian Income‑tax Act on the Commissioner’s application. The question was framed as follows: whether, given the facts and circumstances of the case and a proper construction of the expression “or which would have been allowed to him if the Indian Income‑tax Act, 1922, was in force in the past” in section 13(5)(b) of the Saurashtra Income‑tax Ordinance, 1949, the written‑down value must be computed by deducting from the actual cost the depreciation allowance that would have been permissible under the Indian Income‑tax Act, 1922, even though such an allowance had not been claimed. The High Court answered this question in the affirmative in each case and issued a certificate that the matters were suitable for appeal to the Supreme Court under section 66(A)‑2 of the Indian Income‑tax Act. The present appeals were filed on the basis of those certificates. Counsel for the appellants, Mr Kolah, argued that the Ordinance did not contain the words “would have been allowable to him” nor the words “would have been allowed to him if a claim supported by prescribed particulars had been made”, and therefore it was unjustified to read such words into the Ordinance. He emphasized that, even when the Indian Income‑tax Act is in force, a taxpayer may deliberately choose not to make a claim for depreciation, in which case no depreciation allowance would be granted. He conceded that the intent of the Rai Pramukh in using the wording might have been to imply that the depreciation which could have been allowed, assuming a proper claim had been made and the Indian Income‑tax Act, 1922, had been applicable, should be deducted in ascertaining the written‑down value. Nevertheless, he contended that the actual words used were insufficient to convey that intention. According to him, to give effect to such an intention the clause should have explicitly included the words “if a claim had been made supported by proper particulars” or at least “if a claim had been made”. In our view, the words that Mr Kolah considered necessary are implicit in the language employed, even though they are not expressed verbatim. The authority that enacted the Ordinance should be recognized as having understood that, without a claim supported by proper particulars, no depreciation would have been allowed even if the Indian Income‑tax Act, 1922, had been in force. Hence, the use of the phrase “which would have been allowed to him” was intended to mean “which should have been allowed if a proper claim had been made”, and those words are sufficient to give effect to the intended construction.

In this case, the Court observed that the phrase “which would have been allowed to him” was intended to signify “which should have been allowed if a proper claim had been made.” The Court explained that it would be meaningless to discuss a depreciation allowance without a claim being filed, and therefore the language used was appropriate and sufficient to convey the intention that, had the Indian Income‑tax Act of 1922 been applicable in the State, the depreciation that would have been allowed on the basis of a proper claim should be deducted when determining the written‑down value. Counsel for the assessee argued that this construction placed the assessee in a worse position than if the 1922 Act had actually been in force in Saurashtra, because only depreciation actually allowed in earlier years would be deductible; consequently, if no claim had been made and no depreciation had been allowed, nothing could be deducted under this head. The counsel further contended that it was unreasonable for section 13(5)(b) of the Ordinance to create a fictitious disadvantage for the assessee compared with the situation where the Act had been operative. The Court noted that it was not unreasonable to suppose that, when the Ordinance was drafted, the Raj Pramukh presumed that, had the 1922 Act been in force, a proper claim would ordinarily have been filed and whatever depreciation was permissible under that law would have been allowed. The Court held that the wording left no doubt about the authority’s intention and, as previously stated, was apt and sufficient to give effect to that intention. The counsel also urged that the provision would cause undue hardship by treating the assessee as having claimed depreciation when none had actually been taken. The Court replied that the wording was clear on its meaning and that any alleged hardship was irrelevant. The Court further dismissed the two cases cited by the counsel as unhelpful. In Commissioner of Income‑tax v. Kamala Mills Ltd. (1) the Calcutta High Court had held that the expression “actually allowed” in section 10(5)(b) of the Indian Income‑tax Act, as amended by the Income‑tax (Amendment) Act (XXIII of 1941), was unambiguous and meant that the allowance had been truly granted, rejecting the tax authority’s argument that “actually allowed” merely meant “allowable” under the law then in force. That decision did not involve an expression such as “depreciation which would have been allowed if the Indian Income‑tax Act, 1922, was in force.” Similarly, in Rajaratna Naranbhai Mills Ltd. v. Commissioner of Income‑Tax (1) the Bombay High Court considered the phrase “the amount of depreciation applicable” and held that, because the words were “depreciation applicable” rather than “depreciation allowed,” it was immaterial whether the assessee had obtained any depreciation benefit in prior years. That case also did not address the effect of the wording presently under consideration. Consequently, the Court concluded that the cited authorities did not apply to the matters before it.

The High Court was required to interpret the expression “the amount of depreciation applicable.” In reaching its conclusion, the Court observed that the phrase does not use the words “depreciation allowed” but rather “depreciation applicable.” Consequently, the Court held that it was irrelevant whether the assessee had actually obtained any benefit of depreciation in any earlier year. The Court further noted that it was not called upon to examine the effect of the expression that is now before this Court, namely “depreciation which would have been allowed if the Indian Income‑Tax Act, 1922 had been in force.” Because the earlier decisions dealt with a different wording, they could not be applied to the present appeals. Accordingly, the present Court affirmed that the High Court had correctly answered the question that arose in the two civil appeals, giving a positive answer. The correctness of that answer was thus accepted.

The dispute for the assessment year 1951‑52 presented a distinct factual scenario. In 1950 Saurashtra was incorporated as a Part B State of the Union of India, and under section 3 of the Indian Finance Act, 1950 the Indian Income‑Tax Act was extended to that State. Hence, for the year 1951‑52 the Indian Income‑Tax Act, 1922, was the applicable law in Saurashtra, which included the district of Bhavnagar. When determining the written‑down value of assets that had been acquired before the previous year, the Income‑Tax Officer was required to apply section 10(5)(b) of the Indian Income‑Tax Act, 1922, which provided that “in the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Act, or any Act repealed thereby, or under executive orders issued when the Indian Income‑Tax Act, 1886 (11 of 1886) was in force.” The Officer therefore deducted, in addition to the depreciation allowed for the year 1950‑51 under the Indian Income‑Tax Act, the depreciation that had been allowed for the year 1949‑50 under the Saurashtra Income‑Tax Ordinance and the depreciation that the assessee had claimed in earlier years under the Bhavnagar War Profits Act. There was no dispute that the depreciation deducted for the year 1950‑51 was proper. Although a question could have been raised concerning the depreciation allowed for 1949‑50 under the Saurashtra Ordinance, the assessee conceded that this amount had also been correctly deducted, and no objection was raised before the High Court or this Court. The sole remaining issue concerned whether the depreciation claimed under the Bhavnagar War Profits Act—amounting to Rs 5,93,285 in Civil Appeal No. 600/62 by Mahalaxmi Mills Ltd. and Rs 1,26,707 in Civil Appeal No. 602/62 by Master Silk Mills Ltd.—was permissible under law. The Appellate Assistant Commissioner concurred with the Income‑Tax Officer that the amount was allowable, whereas the Appellate Tribunal adopted a contrary position. On the Commissioner of Income‑Tax’s request, two questions were referred to the High Court under section 66(1) of the Indian Income‑Tax Act: (1) whether, in view of the facts and circumstances, the written‑down value should be computed after deducting the depreciation allowance that could have been claimed under the Indian Income‑Tax Act, 1922, and (2) whether Notification No. 19 dated 9 March 1953 was beyond the constitutional powers of the Central Government. The High Court answered the second question affirmatively, a conclusion that is not contested before this Court. Regarding the first question, this Court observed that the matter actually examined by the High Court was not precisely reflected in the wording of the question as framed, and both parties agreed that the true issue sought by the High Court could be expressed as whether, on the facts of the case, the written‑down value should be calculated after permitting the depreciation that would have been allowed under the Indian Income‑Tax Act, 1922.

The Court noted that the two questions referred to the High Court under section 66(1) of the Indian Income‑tax Act required answers. The second question asked whether Notification No 19 (S.R.O. 477) dated 9 March 1953 exceeded the powers of the Central Government, and the High Court had answered this affirmatively; that answer was no longer contested. Regarding the first question, the Court observed that the matter actually considered by the High Court was not clearly expressed in the original formulation. Both parties agreed that the real issue sought from the High Court could be stated as follows: whether, in light of the facts and a proper interpretation of section 10(5)(b) of the Indian Income‑tax Act, 1922 read together with paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 and Notification No 19 (S.R.O. 477) dated 9 March 1953 under section 60A, the depreciation claimed by the assessees under the Bhavnagar War Profits Act was a deductible amount for computing the written‑down value of the assets. The Court observed that the validity of the Notification was already decided in the second question and was not before it again. What remained for the High Court to decide was the effect of paragraph 2 of the Removal of Difficulties Order, hereinafter referred to as the “Removal of Difficulties Order.” The High Court had held that the provisions of that paragraph applied to the assessment years 1951‑52 and required that the depreciation already availed of under the Bhavnagar War Profits Act be deducted when calculating the written‑down value. The correctness of that decision was now being challenged in appeals 600 and 602 of 1962. The Removal of Difficulties Order had been issued by the Central Government on 2 December 1950 under the authority of section 12 of the Finance Act, 1950 and section 5 of the Opium and Revenue Laws (Extension of Application) Act, 1950, though the present case concerned only section 12 of the Finance Act. That provision states that if any difficulty arises in giving effect to the provisions of any Acts, rules or orders extended by section 3 or section II to any State or merged territory, the Central Government may, by order, make such provision or give such direction as it deems necessary to remove the difficulty.

The Court explained that under section twelve of the Finance Act, 1950 the Central Government possessed the authority to issue an order or direction whenever it identified a difficulty in applying the provisions of any law, rule or order that had been extended to a Part B State by section three of the same Act. Section three had, in fact, extended the Indian Income‑tax Act, 1922 to the Part B States of the Union, and there was no dispute that the Central Government was competent to promulgate the Removal of Difficulties Order, 1950, for any problem that arose in giving effect to the Income‑tax Act in the territories to which it had been extended. In the text of the Order the Government expressly stated that “certain difficulties had arisen in giving effect to the provisions of the Indian Income‑tax Act, 1922 … in Part B States,” and therefore the Order was issued. The Court referred to the earlier decision in Commissioner of Income‑tax Hyderabad v. Dewan Bahadur Ran; Gopal Mills Ltd., (1) which held that it is for the Central Government to determine whether a difficulty of the kind described in section twelve has arisen and, if so, to make the appropriate order or direction. On that basis, counsel for the respondent conceded that the Order had been validly made. However, he argued that the provisions of paragraph 2 of the Order could apply only in cases where a difficulty was actually experienced in applying the Income‑tax Act, and that no such difficulty existed in the present assessments, rendering paragraph 2 inapplicable. The Court rejected that contention, agreeing with the High Court that once the Order had been validly issued under section twelve, all of its paragraphs—including paragraph 2—must be applied to the assessments in question without any exception. Paragraph 2 reads: “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 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 (iv) of sub‑section 2, and the written down value under clause (b) of sub‑section 5, of section 10, of the said Act.” The Court emphasized that these words obligate the assessor to consider all depreciation permitted under the relevant State legislation when calculating the written‑down value under section 10(5)(b) of the Indian Income‑tax Act, irrespective of whether any difficulty actually arose in the particular case. Consequently, the legal requirement is that the provisions of paragraph 2 be applied to compute depreciation, and the existence of a factual difficulty is irrelevant to the operation of the Order.

In this case the Court explained that when the Central Government makes an order under section twelve, it must first be satisfied that difficulties have actually arisen in applying the provisions of the Indian Income‑tax Act. Once that satisfaction is reached and the order is issued, the order is effective for all subsequent cases without the need to re‑establish the existence of a difficulty in each individual case. Consequently, a separate order under section twelve is not required for each particular case. The order, having been made on the basis of the Government’s satisfaction that difficulties exist in some cases, operates according to its own terms, and the Income‑tax Officer is not required to first determine whether a difficulty has arisen before giving effect to the order. The Court held that it was unnecessary to examine whether any difficulty actually arose in the matters presently before it concerning the application of the 1922 Income‑tax Act in the Part B State. Accordingly, paragraph two of the Removal of Difficulties Order must be applied according to its language, without a separate inquiry into the existence of difficulty. The Court then turned to the principal argument of counsel for the petitioner, who contended that the Bhavnagar War Profits Act was not one of the laws whose depreciation allowances must be deducted under paragraph two of the Order. He observed that the Bhavnagar War Profits Act had ceased to be in force long before the Part B State—identified as the United States of Saurasbtra—came into existence, and therefore it was never a law of a Part B State. The Court accepted that observation as correct, but noted that the remaining question was whether the Bhavnagar War Profits Act fell within the phrase “any law relating to tax on profits of business” in the paragraph. If it did, then depreciation claimed under that Act would have to be deducted when computing the written‑down value. In analyzing the clause, the Court observed that the words “of a Part B State” qualify the phrase “any laws or rules” in the first part of the provision, but the same qualifying words are not repeated in the second part that mentions “any law relating to tax on profits of business.” Counsel for the petitioner argued that the omission of “of a Part B State” after the second phrase was an ellipsis intended to avoid a cumbersome sentence. The Court noted this argument but reserved further consideration of whether the omission was indeed an ellipsis or a deliberate exclusion.

The Court explained that ellipsis is a recognized rhetorical device in which words are omitted to improve the rhythm or balance of a sentence, and that such omission is intended to preserve the meaning while avoiding cumbersome language. After careful consideration, however, the Court concluded that the omission of the words “of a Part B State” in the relevant paragraph was not an instance of ellipsis but a deliberate exclusion intended to bring within scope laws that were not originally statutes of a Part B State but had later become laws in the same area before the territory was incorporated into a Part B State. The Court observed that if the omission had indeed been an ellipsis, as counsel for the petitioner argued, it would have been reasonable to assume that the phrase “any law relating to tax” would also have been omitted, resulting in a reading of the paragraph as “all depreciation actually allowed under any laws or rules of a Part B State relating to Income‑tax and super‑tax or tax on profits of business.” The Court further noted that, absent an intention to include depreciation allowed under a law that had previously been a law of a component part of the Part B State, the insertion of the words “or any law relating to tax on profits of business” would be unnecessary, because a law relating to tax on profits of business is itself a law relating to Income‑tax and would already fall within the first part of the clause. The Court then referred to the 1949 Ordinance under which certain taxation statutes were extended to Merged States and the accompanying “Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949.” Paragraph 2 of that Order stated only that “all depreciation actually allowed under any laws or rules of a merged State relating to Income‑tax and super‑tax shall be taken into account,” without mentioning “any law relating to tax on profits of business.” The Court held that the addition of the words “any law relating to tax on profits of business” in the Removal of Difficulties Order was a purposeful act to include depreciation allowed under such laws, even though those laws were not statutes of a Part B State but of a component State. Consequently, the Court concluded that the Bhavnagar War Profits Act falls within the expression “any law relating to tax on profits of business” in paragraph 2 of the Removal of Difficulties Order. The Court affirmed that the High Court was correct in holding that depreciation claimed under the Bhavnagar War Profits Act constituted a deductible amount for computing the written‑down value of the assets. All appeals were dismissed with costs, and a single set of hearing fees was ordered for all the appeals.

In the concluding portion of the judgment, the Court recorded that the appeals were dismissed. By issuing a dismissal, the Court indicated that it found the arguments presented by the petitioners insufficient to warrant any alteration of the earlier determination. The dismissal signified that the relief sought by the petitioners was not granted and that the legal positions advanced in the appeals were rejected. As a result of the dismissal, the proceedings were terminated and no further adjudication on the matters raised in the appeals was to be undertaken. The order of dismissal therefore left the earlier findings and rulings in force, and the parties were required to accept the finality of that decision. This determination brought the case to a close, with the Court’s statement of dismissal serving as the definitive resolution of the appeals.