Mahalaxmi Mills Ltd. vs Commissioner of Income Tax, Bombay

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 23 October, 1963

Coram: A.K. Sarkar, K.C. Das Gupta, M. Hidayatullah

The case was titled Mahalaxmi Mills Ltd. versus The Commissioner of Income‑Tax, Bombay and was decided on 23 October 1963 by the Supreme Court of India. The Bench consisted of Justice A. K. Sarkar, Justice K. C. Das Gupta and Justice M. Hidayatullah. The judgment was authored by Justice Das Gupta. The Court explained that the “assessee” was the appellant in each of the four appeals that arose from references made under section 66(1) of the Indian Income‑Tax Act to the High Court of Bombay. In two of those appeals, identified as Civil Appeals Nos. 599 and 600 of 1962, the appellant‑assessee was Mahalaxmi Mills Ltd. In the remaining two appeals, Civil Appeals Nos. 601 and 602 of 1962, the appellant‑assessee was Master Silk Mills Ltd. Appeals Nos. 599 and 601 concerned the assessment year 1949‑50, while the other two appeals dealt with the assessment year 1951‑52. The Court noted that the central dispute in all four matters related to the method of computing the written‑down value for the purpose of calculating the depreciation allowance.

Both appellant companies had, prior to the assessment year 1949‑50, been carrying on business in Bhavnagar, a territory that had formerly been an Indian State. In 1948, Bhavnagar together with other states of the Kathiawar region formed a union called the United States of Kathiawar, a name that was later altered to Saurashtra. On 16 March 1949, the Raj Pramukh of the newly created State promulgated the Saurashtra Income‑Tax Ordinance, 1949, which remained in force for only one year, namely the assessment year 1949‑50. Consequently, when assessing the profits of the two appellant companies for that year, the Income‑Tax Officer was required to apply the provisions of this Ordinance. To determine the depreciation allowance to which the assessee was entitled in computing the profits or gains of the business, the written‑down value of the building, machinery, plant and furniture first had to be ascertained in accordance with section 13(5) of the Ordinance. Section 13(5) defined “written‑down value” as follows: (a) for assets acquired in the previous year, the actual cost to the assessee; and (b) for assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Ordinance or under any repealed Act, or which would have been allowed to him if the Indian Income‑Tax Act, 1922, had been in force in the past.

The Court observed that the assets of both appellant companies had been acquired before the previous year, and therefore the provision of section 13(5)(b) applied. Interpreting the concluding words of section 13(5)(b) as meaning “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 depreciation that would have been allowable under the 1922 Act, assuming that the Act had been in force and that a claim supported by the prescribed particulars had been made. The amount of such deduction was then taken into account in the calculation of the written‑down value for each appellant.

Mahalaxmi Mills Ltd., which was the appellant in Civil Appeal No. 599/62, had its written‑down value computed at Rs 17,21,041, while Master Silk Mills Ltd., the appellant in Civil Appeal No. 601/62, had its written‑down value computed at Rs 2,02,500. The immediate effect of deducting these amounts was that the resulting written‑down values were substantially lower than they would have been had the deductions not been made, and consequently the depreciation allowances available to the appellants were correspondingly reduced. The assessee argued that no such deduction should have been permitted on the basis of the words “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 depreciation had been made and, in fact, no claim could have been made for that allowance. The Income‑tax Officer rejected this contention. By contrast, the Appellate Assistant Commissioner together with the Income‑tax Tribunal adopted a different approach and held 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 head in question. Because of this disagreement, the question of law was referred to the High Court under section 66(1) of the Indian Income‑tax Act on the Commissioner of Income‑tax’s application. The question framed for the High Court read: “Whether, on the facts and circumstances of the case and on 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 allowable under the Indian Income‑tax Act, 1922, even though such allowance was not claimed?” The High Court answered this question in the affirmative in each case and, further, issued a certificate that the matter was suitable for appeal to the Supreme Court under section 66(A)(2) of the Indian Income‑tax Act. Consequently, the present appeals were filed on the basis of those certificates. Counsel for the appellants, identified only as the representative for the petitioners, argued that the Ordinance never employed the words “would have been allowable to him” nor the phrase “would have been allowed to him if a claim supported by prescribed particulars had been made,” and therefore there was no justification for reading such words into the statutory language. The counsel emphasized that, under the Indian Income‑tax Act, an assessee might deliberately choose not to make a claim for depreciation, resulting in no allowance being granted. He acknowledged that the intention of the Raj Pramukh in drafting the Ordinance might have been that depreciation which could have been allowed, provided a proper claim had been made and substantiated, assuming the Indian Income‑tax Act, 1922, had been in force, should be deducted when determining the written‑down value.

The Court observed that the purpose of the provision was to determine the written down value of the asset. Counsel for the appellants argued that the language actually employed in the Ordinance was insufficient to convey that purpose. He maintained that, in order to give effect to the intended meaning, the clause should have contained the phrase “if a claim had been made supported by proper particulars.” He further submitted that at a minimum the words “if a claim had been made” should have been inserted. The Court held that the language required by the counsel was already implicit in the words that had been used, although those words were not expressed verbatim. The Court observed that the authority which framed the Ordinance must be praised for recognizing that no depreciation would have been allowed under the 1922 Income‑tax Act. The Court added that such a depreciation would not have been allowed if a claim supported by proper particulars had not been filed. Consequently, when the words “which would have been allowed to him” appear in the provision, the Court interpreted them to mean “which should have been allowed if a proper claim had been made.” The Court reasoned that it would be meaningless to speak of a depreciation allowance being granted without any claim having been filed. In the Court’s view, the language employed was adequate and sufficient to convey the intention that, had the 1922 Income‑tax Act been in force, the depreciation that would have been allowed if a proper claim had been made should be deducted. That deduction, the Court explained, would be made when ascertaining the written down value of the asset.

The appellant’s counsel objected that, under this construction, the taxpayer’s position became less favorable than it would have been if the 1922 Income‑tax Act had actually applied in Saurashtra. He argued that, had the Act been in force, only the depreciation actually allowed in earlier years could be deducted, and where no claim had been filed, no depreciation would be allowable. The counsel further asserted that it was unreasonable for section 13(5)(b) of the Ordinance to create a situation where the taxpayer suffered a disadvantage greater than that which would have existed under the actual statute. The Court responded that it was not illogical to presume that the framers of the Ordinance expected a proper claim to be made if the 1922 Income‑tax Act had been applicable. In the Court’s judgment, the authority’s language left no doubt about the intention to treat the depreciation that would have been allowable under the 1922 Act, assuming a proper claim, as deductible. That deductible amount, the Court explained, would be taken into account when calculating the written down value. The appellant further argued that imposing the provision would cause undue hardship because the taxpayer would be treated as having taken depreciation although no actual depreciation had been claimed. The Court replied that the language of the provision was clear, and whether any hardship resulted was irrelevant to the construction of the clause.

Neither of the two authorities cited by counsel in support of his argument assists the present case. In Commissioner of Income‑tax v. Kamala Mills Ltd. ([1949] 17 I.T.R. 130.) the Calcutta High Court examined 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). The court held that the phrase is clear and indicates that the allowance must have been given effect to in reality. It rejected the revenue’s contention that “actually allowed” could be interpreted merely as “allowable” under the law then in force. The court did not have to consider any wording resembling “depreciation which would have been allowed if the Indian Income‑tax Act, 1922, was in force.” In the subsequent case of Rajaratna Naranbhai Mills Ltd. v. Commissioner of Income‑tax ([1950] 18 I.T.R. 122.) the Bombay High Court was asked to interpret the phrase “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 actually benefited from depreciation in any prior year. Again, the court was not called upon to address the effect of the words that are presently before us, namely the depreciation that would have been allowed if the Indian Income‑tax Act, 1922, had been in force. Consequently, neither decision is applicable to the appeals that arise from Civil Appeals Nos. 599 and 601. For the reasons previously expressed, the view is that the High Court correctly answered the question referred in those cases in the affirmative.

The controversy for the assessment year 1951‑52 arises on a different factual basis. In 1950 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 territory. Accordingly, during the year 1951‑52 the Indian Income‑tax Act, 1922, was operative in Saurashtra, which included the district of Bhavnagar. Therefore, when the Income‑tax Officer computed the written‑down value of assets acquired before the preceding year, he was required to apply the provisions of section 10(5)(b) of the Indian Income‑tax Act, 1922, which reads: “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, in accordance with this provision, deducted not only the depreciation that had been allowed for the assessment year 1950‑51 under the Indian Income‑tax Act, but also the depreciation allowed for the assessment year 1949‑50 under the Saurashtra Income‑tax Ordinance and the depreciation claimed in earlier years under the Bhavnagar War Profits Act. There can be no genuine dispute that the depreciation allowed for the assessment year 1950‑51 was correctly deducted. A question could have arisen as to the deductibility of the depreciation allowed for 1949‑50 under the Saurashtra Ordinance, but the assessee had conceded that this amount was also properly deducted, and no contention was raised on that point before either the High Court or this Court. The remaining issue, therefore, concerns whether the depreciation availed of under the Bhavnagar War Profits Act—amounting to Rs 5,93,285 in Civil Appeal No. 600/62 and Rs 1,26,707 in Civil Appeal No. 602/62—was legally allowable. The Appellate Assistant Commissioner agreed with the Income‑tax Officer that it was allowable, whereas the Appellate Tribunal took a contrary view, prompting the Commissioner of Income‑tax to refer two specific questions to the High Court under section 66(1) of the Indian Income‑tax Act.

In the assessment for the year 1949‑50, the Income‑tax Officer had also deducted depreciation under the Saurashtra Income‑tax Ordinance; however, before the High Court the assessee admitted that this deduction was proper and no dispute was raised on that point either before the High Court or before this Court. The sole controversy that remained concerned the deductibility, under law, of the depreciation claimed by the assessors under the Bhavnagar War Profits Act. The amounts in dispute were Rs 5,93,285 in Civil Appeal No. 600/62 filed by Mahalaxmi Mills Ltd. and Rs 1,26,707 in Civil Appeal No. 602/62 filed by Master Silk Mills Ltd. The Appellate Assistant Commissioner agreed with the Income‑tax Officer that the depreciation under the Bhavnagar War Profits Act could be allowed. The Appellate Tribunal, however, reached a different conclusion. On a petition by the Commissioner of Income‑tax, the Tribunal referred two questions to the High Court under section 66(1) of the Indian Income‑tax Act. The first question asked whether, on the facts and circumstances of the case and on a correct interpretation of the relevant provisions of section 10(5)(b) 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 issued under section 60A, the written‑down value should be computed after deducting the depreciation allowance that could have been claimed under the Indian Income‑tax Act, 1922. The second question asked whether Notification No. 19 (S.R.O. 477) dated 9 March 1953 was ultra vires the powers of the Central Government. The High Court answered the second question affirmatively, and that finding is no longer contested before this Court. Regarding the first question, it appeared to this Court that the matter actually considered by the High Court was not clearly reflected in the phrasing of the question as framed. Both parties agreed that the true issue before the High Court could be expressed as follows: whether, on the facts and circumstances of the case and on a correct 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 issued under section 60A, the depreciation availed of by the assessors under the Bhavnagar War Profits Act was a deductible amount in computing the written‑down value of the assets. It is noteworthy that the validity of the Notification, which formed the subject‑matter of the second question, was resolved by the High Court, and that resolution was not challenged before this Court. Consequently, the remaining issue for consideration was the effect of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, hereinafter referred to as the “Removal of Difficulties Order”. The High Court held that the provisions of this paragraph applied to the matters under dispute.

In this case, the Court observed that two assessments for the year 1951‑52 required the depreciation already claimed by the assessee under the Bhavnagar War Profits Act to be deducted when calculating the written down value, and that the correctness of that decision was being challenged before the Court in Civil Appeals numbered 600 and 602 of 1962. The Court explained that the Removal of Difficulties Order had been issued by the Central Government on 2 December 1950, exercising the authority given by section 12 of the Finance Act, 1950, and also by section 5 of the Opium and Revenue Laws (Extension of Application) Act, 1950; however, the present dispute concerned only the provision contained in section 12 of the Finance Act. That provision stated that if any difficulty arose in giving effect to the provisions of any Acts, rules or orders extended to a State or merged territory by section 3 or section 11, the Central Government might, by order, make such provision or issue such direction as it considered necessary to remove the difficulty. The Court noted that section 3 of the Finance Act had extended the Indian Income‑tax Act, 1922, to the Part B States of the Union of India, and that it was not contested that the Central Government possessed the competence to make the Removal of Difficulties Order, 1950, whenever a difficulty in applying the Income‑tax Act to a Part B State arose. In the Order, the Central Government expressly declared that certain difficulties had arisen in giving effect to the provisions of the Indian Income‑tax Act, 1922, within Part B States, and therefore the Order was issued. Referring to the precedent set in Commissioner of Income‑tax Hyderabad v. Dewan Bahadur Ram Gopal Mills Ltd., the Court reiterated that it was for the Central Government to decide whether a difficulty as described in section 12 had arisen and then to issue an order or direction it deemed appropriate. On that basis, the counsel for the respondent conceded the validity of the Order but argued that the provisions of paragraph 2 could operate only when an actual difficulty was experienced in a particular case, and contended that no such difficulty had arisen in the present assessments, so paragraph 2 should not apply. The Court rejected that contention, holding that once the Removal of Difficulties Order was validly made under section 12, all of its paragraphs, including paragraph 2, became applicable without exception. Paragraph 2 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 any law on tax on business profits must be taken into account in computing the aggregate depreciation allowance and the written down value under the relevant provisions of the Act.

In the provision of the Removal of Difficulties Order, the text states that “law relating to tax on profits of business” must be taken into account when 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 Indian Income‑tax Act.” Those words require 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 included in the calculation of the written‑down value under section 10(5)(b) of the Act, regardless of whether a particular case has experienced any difficulty in applying the Act. The law mandates that before the Central Government may issue an order under section 12, it must be satisfied that difficulties have actually arisen in some cases in giving effect to the provisions of the Act. Once that satisfaction is obtained and the order is made, the order operates on its own terms and it is not necessary to re‑establish the existence of a difficulty for each individual case. The order does not need to be re‑issued for every specific situation; after the government has determined that difficulties exist in certain cases, the order applies automatically, and the Income‑tax Officer does not need to first verify that a difficulty has arisen before applying the order.

The Court held that it is unnecessary to examine whether a difficulty actually arose in the present cases concerning the application of the Indian Income‑tax Act, 1922, in the Part B State. Paragraph 2 of the Removal of Difficulties Order must be applied according to its plain terms, without any further inquiry into the existence of a specific difficulty. The principal issue raised by Mr. Kolah was that the Bhavnagar War Profits Act should not be considered one of the laws whose depreciation is required to be deducted under paragraph 2 because the Act had ceased to be in force before the Part B State, the United States of Saurashtra, came into existence. Consequently, it could not be regarded as a law of a Part B State, and depreciation claimed under it would fall outside the phrase “all depreciation actually allowed under any laws or rules of a Part B State relating to income‑tax and super‑tax.” While this argument appears correct, the Court noted that the remaining question was whether the Bhavnagar War Profits Act falls within the broader phrase “any law relating to tax on profits of business.” If it does, then the depreciation taken under that Act must be deducted when computing the written‑down value.

The Court observed that, if the clause was applicable, the depreciation claimed by the assessee under the Act had to be subtracted when calculating the written‑down value of the assets. In examining the wording of the clause – “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” – the Court noted that the phrase “of a Part B State” qualified only the words “any laws or rules” in the first segment of the provision. The same qualifying words did not appear after the term “any law” in the second segment. Counsel for the petitioner argued that the words “of a Part B State” were intended to follow “any law” as well, and that they had been omitted merely by ellipsis so that the sentence would not become cumbersome. The Court explained that ellipsis is a recognized rhetorical device in which words necessary for full construction are left out to achieve smoother rhythm or balance. After careful deliberation, the Court concluded that the omission of “of a Part B State” in the second part of the clause was not an instance of ellipsis but a deliberate choice intended to bring within the provision those laws that were not technically statutes of a Part B State at the relevant time, yet had existed in the same territorial area before that area became part of a Part B State. The Court reasoned that, had the omission been true ellipsis, it would have been logical to also omit the words “any law relating to tax” and to read the provision 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.” Moreover, the Court found that, if the purpose had not been to include depreciation allowed under a law that previously governed a component of the Part B State, the additional phrase “or any law relating to tax on profits of business” would have been unnecessary. This is because a law described as “relating to tax on profits of business” is inherently a law relating to Income‑tax, and therefore depreciation permitted under such a law, when it was a law of a Part B State, would already fall within the initial part of the clause. The Court also pointed out that, in 1949, when an Ordinance extended certain taxation statutes to the Merged States, the Central Government, under section 8 of that Ordinance, issued the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949. Paragraph 2 of that Order simply provided 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,” and it made no reference to “any law relating to tax on profits of business.”

The Removal of Difficulties Order was amended to insert the expression “any law relating to tax on profits of business.” The amendment appears to have been made deliberately so that depreciation permitted under such statutes would be taken into account even if those statutes did not originate as laws of a Part B State. In this case the Court examined whether the Bhavnagar War Profits Act fell within the meaning of the phrase inserted in paragraph 2 of the Removal of Difficulties Order. The Court concluded that the Bhavnagar War Profits Act indeed qualifies as “any law relating to tax on profits of business” as contemplated by that provision. Accordingly the Court affirmed the earlier decision of the High Court that the depreciation claimed by the assessee under the Bhavnagar War Profits Act should be treated as a deductible amount. That deductible amount was to be taken into account when calculating the written‑down value of the assets for the assessment year in question. The Court therefore ordered that all the appeals pending before it be dismissed and that the costs of the proceedings be awarded against the appellants. The Court further directed that a single set of hearing fees be payable for all the appeals as a matter of administrative convenience. In conclusion the appeal was dismissed with costs and no further relief was granted to either party in this matter.