Mahalaxmi Mills Ltd. and Another vs Commissioner of Income-Tax, Bombay

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

Court: supreme-court

Case Number: Not extracted

Decision Date: 23 October 1963

Coram: DAS GUPTA J.

In this matter, the Court recorded that the respondent‑assessees were the appellants in four separate appeals that originated from references made under section 66(1) of the Indian Income‑tax Act to the High Court of Bombay. Two of the appeals, identified as Civil Appeals Nos. 599 and 602 of 1962, were filed by Mahalaxmi Mills Ltd., while the remaining two, Civil Appeals Nos. 601 and 502 of 1962, were filed by Master Silk Mills Ltd. Appeals Nos. 599 and 601 concerned the assessment year 1949‑50, and the other two appeals concerned the assessment year 1951‑52. The central dispute in every appeal centered on the method of computing the written‑down value for the purpose of calculating the depreciation allowance.

Both companies had been carrying on business in Bhavnagar before the assessment year 1949‑50. In 1948, Bhavnagar together with other princely states of Kathiawar formed a political union called the United States of Kathiawar, which was later renamed Saurashtra. On 16 March 1949, the Raj Pramukh of the new State promulgated the Saurashtra Income‑tax Ordinance, 1949. That Ordinance was operative for a single year, namely the assessment year 1949‑50. Consequently, when the Income‑tax Officer assessed the profits of the two appellant companies for that year, he was required to apply the provisions of the Saurashtra Ordinance.

The Ordinance, in section 13(5), defined “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the assessee less all depreciation that had actually been allowed to him under the Ordinance, or under any earlier Act repealed by the Ordinance, or which would have been allowed to him if the Indian Income‑tax Act, 1922, had been in force in the past.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 Mahalaxmi Mills Ltd. and Master Silk Mills Ltd. were acquired before the preceding year, the second limb of the definition, section 13(5)(b), applied.

Interpreting the words in the final part of section 13(5)(b) as equivalent to “which would have been allowable to him if the Indian Income‑tax Act, 1922, was in force,” the Income‑tax Officer, in determining the written‑down value, deducted an amount of depreciation that would have been allowable under the 1922 Act had that statute been applicable and had a claim for such depreciation been made with the required particulars. The amount so deducted, in the case of Mahalaxmi Mills Ltd., formed the basis of the appellant’s contention that the written‑down value had been reduced excessively, leading to a lower depreciation allowance.

In the assessment case numbered 599 of 1962, the written down value was computed at Rs. 17,21,041. In the parallel assessment for Master Silk Mills Ltd., identified as case number 601 of 1962, the written down value was calculated at Rs. 2,02,500. By deducting these amounts, the resulting written down values were considerably lower than they would have been had the deductions not been made, and consequently the depreciation allowances that could be claimed were reduced. The assessors argued that no such deduction should have been permitted on the basis of the phrase “which would have been allowed to him if the Indian Income‑tax Act, 1922, was in fact in force in the past,” because no claim for that allowance had been made nor could one have been made. The Income‑tax Officer rejected that contention. However, both the Appellate Assistant Commissioner and the Income‑tax Tribunal adopted a contrary view, holding that the expression “or which would have been allowed to him if the Indian Income‑tax Act, 1922, was in force in the past” did not empower the Income‑tax Officer to make any deduction under the relevant head. The legal question that arose was referred to the High Court under section 66(1) of the Indian Income‑tax Act on an application made by the Commissioner of Income‑tax. The question was framed as follows: whether, given the facts and circumstances, and interpreting 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 allowable under the Indian Income‑tax Act, 1922, even though such allowance had not been claimed. In each of the two cases, the High Court answered this question affirmatively and issued a certificate that the matters were suitable for appeal to the Supreme Court under section 66A(2) of the Indian Income‑tax Act. The present appeals were filed on the basis of those certificates. Counsel for the appellants, identified as Mr. Kolah, argued that the Ordinance does 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.” He maintained that there is no justification for reading such words into the provision, especially because an assessee, when the Indian Income‑tax Act is in force, might deliberately refrain from making a claim for depreciation, resulting in no allowance being permitted. He acknowledged that the intention of the Raj Pramukh in using the language may have been to refer to depreciation that could have been allowed if a proper claim had been made and substantiated, assuming the 1922 Act was in force, and that such depreciation should be deducted when determining the written down value. Nevertheless, he contended that the actual words employed in the Ordinance are insufficient to express that intention.

The Court noted that counsel for the appellant argued that, in order to give effect to the intended meaning of the provision, it was necessary to include the words “if a claim had been made supported by proper particulars” or at least the shorter phrase “if a claim had been made.” According to this submission, without such words the clause could not convey the intended consequence. The Court, however, held that the language already employed in the provision implicitly contained the meaning that counsel claimed was missing, even though those exact words were not expressed. The Court praised the authority that framed the Ordinance for having recognised that no depreciation allowance would have been granted, even if the Indian Income‑tax Act of 1922 had been applicable, unless a claim supported by proper particulars had been filed. Consequently, when the provision spoke of “which would have been allowed to him,” the Court interpreted those words to mean “which should have been allowed if a proper claim had been made.” The Court emphasized that speaking of a depreciation allowance being granted without a claim would be meaningless. In the Court’s view, the wording was appropriate and sufficient to convey the intention that, had the Income‑tax Act of 1922 been in force in the State, the depreciation that would have been allowed on the basis of a proper claim should be deducted when computing the written‑down value.

Counsel for the appellant further contended that the Court’s construction placed the assessee in a worse position than would have existed had the Indian Income‑tax Act of 1922 actually been operative in Saurashtra. He argued that, under the Act, only depreciation actually allowed in earlier years could be deducted; therefore, if no claim had been made and no depreciation actually allowed, nothing could be deducted under the head of depreciation. He maintained that it was unreasonable for section 13(5)(b) of the Ordinance to create a “fiction” that disadvantaged the assessee more than the statute itself would have. The Court, however, observed that it was not unreasonable to presume that the Raj Pramukh, when drafting the Ordinance, expected that a proper claim would ordinarily have been filed if the 1922 Act had been in force, and that whatever was permissible under that law would have been allowed as depreciation. The Court reiterated that the words used left no doubt as to the authority’s intention and were adequate to give effect to that intention. Counsel also argued that the provision caused undue hardship because the assessee would be treated as having availed depreciation without actually doing so. The Court responded that the wording was clear on its meaning, and whether any hardship resulted was irrelevant to the interpretation. Finally, the Court dismissed the two cases cited by counsel as providing no assistance to his argument.

In the case of Commissioner of Income‑tax v. Kamala Mills Ltd., the Calcutta High Court examined the phrase “actually allowed” that appears in section 10(5)(b) of the Indian Income‑tax Act as amended by the Income‑tax (Amendment) Act (XXIII of 1941). The Court held that the expression is clear and means that the allowance must have been given effect to in reality. The Court rejected the income‑tax authority’s argument that “actually allowed” could be interpreted merely as “allowable” under the law then in force. That decision did not involve any wording similar to “depreciation which would have been allowed if the Indian Income‑tax Act, 1922, was in force.” In a separate decision, Rajaratna Naranbhai Mills Ltd. v. Commissioner of Income‑tax, the Bombay High Court was asked to interpret the words “the amount of depreciation applicable.” The Court observed that because the language referred to “depreciation applicable” rather than “depreciation allowed,” it was irrelevant whether the assessee had received any depreciation benefit in earlier years. That case also did not require the Court to consider the effect of the words that are presently in issue, namely the depreciation that would have been allowed if the Indian Income‑tax Act, 1922, had been in force. Consequently, neither of those judgments is applicable to the present appeals. For the reasons already set out, the Court agrees with the view expressed by the High Court in the cases that gave rise to Civil Appeals Nos. 599 and 601, and holds the answer to the question raised in those appeals to be affirmative.

The dispute for the assessment year 1951‑52 arises in a different factual setting. In 1950 the State of Saurashtra became a Part B State of the Union of India, and by virtue of section 3 of the Indian Finance Act, 1950, the Indian Income‑tax Act was extended to that State. Accordingly, during the year 1951‑52 the Indian Income‑tax Act, 1922, was the applicable law in Saurashtra, which included the district of Bhavnagar. When the Income‑tax Officer computed the written‑down value of assets that had been acquired before the previous year, he was required to apply the provisions of section 10(5)(b) of the Indian Income‑tax Act, 1922, which states: “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 (II of 1886), was in force.” The Officer therefore deducted the depreciation that had been allowed for the assessment year 1950‑51 under the Indian Income‑tax Act, the depreciation that had been allowed for the assessment year 1949‑50 under the Saurashtra Income‑tax Ordinance, and also the depreciation that the assessee had claimed in earlier years under the Bhavnagar War Profits Act. There is no dispute that the deduction of the depreciation allowed for 1950‑51 was correct. Although there might have been a question concerning the depreciation allowed for 1949‑50 under the Saurashtra Ordinance, the assessee admitted before the High Court that this amount too was properly deducted, and no contention was raised on that point either before the High Court or before this Court.

In this matter, the only issue that continued to be contested was whether the depreciation claimed under the Bhavnagar War Profits Act could be allowed as a deduction. The amounts in dispute were Rs 5,93,285 claimed in assessment case 600 of 1962 by Mahalaxmi Mills Ltd. and Rs 1,26,707 claimed in assessment case 602 of 1962 by Master Silk Mills Ltd. The Appellate Assistant Commissioner concurred with the Income‑tax Officer that such depreciation was legally deductible. By contrast, the Appellate Tribunal reached a different conclusion. Upon the request of the Commissioner of Income‑tax, the Tribunal referred two specific questions to the High Court under section 66(1) of the Indian Income‑tax Act. The first question asked whether, given the facts and a proper interpretation of section 10(5)(b) 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, the written‑down value under section 60A should be computed after subtracting any depreciation allowance that could have been claimed under the Indian Income‑tax Act, 1922. The second question sought to determine whether Notification No 19 (S. R. O. 477) dated 9 March 1953 was beyond the powers of the Central Government. The High Court answered the second question affirmatively, and that determination was not challenged before us.

Regarding the first question, the Court observed that the controversy actually examined by the High Court was not adequately reflected in the wording of the framed question. Both parties agreed that the true issue before the High Court could be expressed as follows: whether, on the facts and with a correct construction 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, the depreciation taken by the assessee under the Bhavnagar War Profits Act should be treated as a deductible amount for the purpose of computing the written‑down value of the assets under section 60A. The Court noted that the validity of the referenced notification had already been addressed by the second question, and the High Court’s finding that it was invalid was not reopened. Consequently, the remaining point for consideration was the effect of paragraph 2 of the Removal of Difficulties Order. The High Court held that the provisions of this paragraph applied to the two assessment years of 1951‑52 and, accordingly, that the depreciation already availed of by the assessee under the Bhavnagar War Profits Act had to be deducted in computing the written‑down value.

In the earlier decision, the High Court had held that depreciation allowed under the Bhavnagar War Profits Act must be deducted when computing the written‑down value of assets. That judgment was contested before the Supreme Court in Civil Appeals numbered 600 and 602 of 1962. The Removal of Difficulties Order, which is central to this dispute, was issued by the Central Government on 2 December 1950 under the authority granted by section 12 of the Finance Act, 1950 and by section 5 of the Opium and Revenue Laws (Extension of Application) Act, 1950. In the present matter the Court considered only the provision of section 12 of the Finance Act, 1950, which provides that if any difficulty arises in giving effect to the provisions of any Act, rule or order extended by section 3 or section 11 to any State or merged territory, the Central Government may, by order, make such provision or give such direction as it deems necessary for removing the difficulty. Section 3 of the Finance Act had the effect of extending the Indian Income‑tax Act, 1922, to the Part B States of the Union of India. It was not disputed that the Central Government possessed the competence to issue the Removal of Difficulties Order, 1950, whenever a difficulty was encountered in the operation of the Income‑tax Act in those States. While framing the order, the Central Government expressly declared that certain difficulties had arisen in giving effect to the provisions of the Indian Income‑tax Act in Part B States, and consequently the order was issued. In the earlier case of Commissioner of Income‑tax v. Dewan Bahadur Ram Gopal Mills Ltd., this Court held that it is for the Central Government to determine whether a difficulty of the kind mentioned in section 12 has arisen and then to make the appropriate order or direction. Relying on that decision, counsel for the respondents conceded that the Removal of Difficulties Order had been validly made. However, counsel argued that the provisions of the order could operate in a particular case only when a difficulty was actually experienced in that case, and maintained that no such difficulty had arisen in the present assessments, rendering paragraph 2 inapplicable. The Court found that the High Court correctly rejected that contention. Because the order was validly made under section 12 of the Finance Act, 1950, all of its paragraphs, including paragraph 2, must be applied without exception. Paragraph 2 of the order states: “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 …”.

The Court explained that the language of sub‑clause (c) of the proviso to clause (vi) of sub‑section (2) and the written‑down‑value provision in clause (b) of sub‑section (5) of section 10 required that “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” be taken into account when computing the written‑down value under section 10(5)(b) of the Indian Income‑Tax Act. This requirement applied regardless of whether any difficulty had arisen in a particular case in giving effect to the provisions of the Indian Income‑Tax Act. The Court noted that, as a matter of law, the Central Government could make an order under section 12 of the Finance Act only after being satisfied that, in some cases, difficulties had actually arisen in the operation of the Indian Income‑Tax Act. Once the Central Government was satisfied and the order was issued, the order operated according to its own terms and it was no longer necessary to demonstrate the existence of a difficulty in each individual case. The Court stressed that a separate order under section 12 was not required for every case; the single order, once made on the basis of the Government’s satisfaction that difficulties existed in certain situations, was sufficient to bind the Income‑Tax Officer without the need for a fresh finding of difficulty in each subsequent assessment.

The Court further held that, irrespective of whether any difficulty actually arose in the present matters involving the application of the Indian Income‑Tax Act, 1922, in the Part B State concerned, paragraph 2 of the Removal of Difficulties Order had to be applied according to its plain terms. Consequently, it was unnecessary to inquire into the existence of any such difficulty in the present cases. The Court then turned to the primary contention raised by Mr Kolah, namely that the Bhavnagar War Profits Act was not one of the laws whose depreciation needed to be deducted under paragraph 2 of the Order. He argued that the Bhavnagar War Profits Act had ceased to be in force long before the United States of Saurashtra, a Part B State, came into existence, and therefore it could not be described as a law of a Part B State. The Court acknowledged that this observation was correct with respect to the first part of the phrase “all depreciation actually allowed under any laws or rules of a Part B State relating to income‑tax and super‑tax.” However, the Court noted that the remaining question was whether the Bhavnagar War Profits Act fell within the broader expression “any law relating to tax on profits of business.” If the Act were covered by that expression, then the depreciation claimed under the Act would have to be deducted in computing the written‑down value. The Court indicated that it would analyse the clause “all depreciation actually …” to determine the proper construction of the phrase.

The clause under consideration reads “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”. The Court observed that the words “of a Part B State” qualify only the phrase “any laws or rules” in the first part of the sentence, and that no similar qualification follows the words “any law” in the second part. Counsel for the petitioner argued that the words “of a Part B State” were meant to apply also after “any law” in the latter portion, and that the omission resulted from an ellipsis intended to avoid a cumbersome construction. The Court explained that ellipsis is a recognized rhetorical device whereby words necessary for the full sense are omitted to improve the rhythm or balance of a sentence. After a careful review, however, the Court concluded that the absence of “of a Part B State” after “any law” was not an ellipsis but a deliberate omission. The deliberate purpose, the Court held, was to bring within the clause those statutes that could not be described as laws of a Part B State because they existed before the territory became part of a Part B State. The Court further noted that, had the omission been an ellipsis as counsel suggested, it would have been logical to also omit the words “any law relating to tax” and to read the second part of the sentence as “or tax on profits of business”. In that hypothetical construction, the clause would have read: “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 also found that if the legislative intention had been to exclude depreciation allowed under a law that was in force in a component of the future Part B State before its inclusion, then the addition of the words “or any law relating to tax on profits of business” would have been unnecessary. This is because a law that relates to tax on profits or business is inherently a law that relates to income‑tax; consequently, depreciation permitted under such a law, when it was a law of a Part B State, would already fall within the first part of the clause. The Court then turned to the historical context of the 1949 legislation. In 1949, by an Ordinance, certain taxation statutes were extended to the Merged States, and under section 8 of that Ordinance the Central Government issued “the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949”. Paragraph 2 of that Order contained only the language: “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.” The Order made no reference to “any law relating to tax on profits of business”. The subsequent Removal of Difficulties Order deliberately inserted the words “any law relating to tax on profits of business”. The Court interpreted this addition as an intentional step to ensure that depreciation allowed under such statutes, even though they were not laws “of a Part B State”, would be taken into consideration.

The Court observed that the Removal of Difficulties Order of 1949 was issued with a clear and deliberate purpose of bringing into account depreciation that was permitted under various statutes, even where those statutes were not statutes of a Part B State but statutes of a component State that had been merged. In applying that purpose, the Court examined the language of paragraph 2 of the Order, which refers to “any law relating to tax on profits of business.” Upon review, the Court concluded that the Bhavnagar War Profits Act falls within that expression and therefore is covered by the provision of the Order. Accordingly, the Court held that the High Court was correct in its finding that the depreciation claimed by the assessee under the Bhavnagar War Profits Act may be treated as a deductible amount when computing the written‑down value of the assessee’s assets. On the basis of this conclusion, the Court dismissed each of the appeals that had been filed against the High Court’s decision and ordered that costs be awarded to the prevailing party. The Court further directed that, notwithstanding the multiple appeals, only a single set of hearing fees should be assessed and payable for all of the appeals considered in this matter.