judgement:
vil Appeal No. 612 (NT) of 1975.
From the Judgment and Order dated 24/25.9.
1974 of the Gujarat High Court in Special Civil Application No. 1797 of 1972.
Harish N. Salve, Mrs. A.K. Verma and Joel Pares for the Appellant.
V.S. Desai, M.B. Rao and Ms. A. Subhashini for the Respondents.
The Judgment of the Court was delivered by KANIA, J.
This is an appeal from the judgment of a Division of 5 the High Court of Gujarat in Special Civil Application No. 1797 of 1972 on a certificate granted under Article 133(1) of the Constitution of India.
The relevant facts are as follows: The assessee is a Private Limited Company and carries on the business of manufacturing and selling textile at Porbun dar in Saurashtra in the Gujarat State.
Before 1948 Porbun dar was a part of the Princely State of that name.
No In come Tax was levied by the erstwhile Porbundar State prior to 1948.
In 1948 there was a merger of several Princely States and as a result of the merger, the State of Saurash tra was formed.
No income tax was levied by the State of Saurashtra till 1949 when it promulgated the Saurashtra Income tax Ordinance.
Under that Ordinance provision was made for the grant of depreciation allowance based on the written down value.
The said Ordinance defined "written down value" as follows: "Written down value" means: (a) in case of assets acquired in the previous year, the actual cost to the assessee; and (b) 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actual cost to the assessee less all depreciation actually allowed to him under this Ordinance or allowed under an act repealed thereby or which would have been allowed to him if the Income tax Act, 1922 was in force in past." On 26th January, 1950 State of Saurashtra became a part of Union of India as a Part B State.
The Indian Income tax Act, 1922 became applicable to the State of Saurashtra from 1st April, 1950 under the provisions of the Fi nance Act, 1950.
By Section 13 of the Finance Act of 1950, which provides for repeals and savings, the Saurashtra Income tax Ordinance was repealed.
Section 12 of that Act provided for the removal of difficulties as follows: "If any difficulty arises in giving effect to the provisions of any of the Acts, rules or orders 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 appears to it to be necessary for removing the difficulty.
" In exercise of the powers conferred upon it by Section 12 of the 6 Finance Act, 1950, the Central Government issued an order known as "Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950".
Clause (2) of the Order of 1950 reads as follows: "Computation of aggregate depreciation allow ance and the written down value: In making any assessment under the Indian Incometax 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 prof its 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 Section 10 of the said Act.
Provided that, where in respect of any asset, depreciation has been allowed for any year both in the assessment made in the Part B State and in the taxable territories, the greater of the two sums allowed shall only be taken into account.
" This order was made by the Central Govern ment on December 2, 1950.
Subsequently, on March 9, 1953, in exercise of the powers conferred upon it by Section 60A of the Indian Income tax Act, 1922, an Explanation was added by the Central Government to the above Clause (2) of the Order of 1950 with effect from that date and that Explanation was in the following terms: "For the purpose of this paragraph, the ex pression 'all depreciation actually allowed under any laws or rules of a Part B State ' means and shall be deemed always to have meant the aggregate allowance for depreciation taken into account in computing the written down value under any laws or rules of a Part B State or carried forward under the said laws or rules." In Commissioner of Income tax, Hyderabad vs D.B.R. Mills Ltd., the Hyderabad High Court held that this Explanation was ultra vires the powers of the Central Government under Section 60A of the Indian Income tax Act, 1922.
After the said decision of the High Court the Central Government issued a notifica 7 tion on 8th May, 1956 in exercise of the powers conferred upon it by Section 12 of the Finance Act, 1950 and under this notification an Explanation in identical terms as the earlier Explanation inserted by an order made under Section 60A of the Indian Income tax Act, 1922 was added to Clause (2) of the Removal of Difficulties Order, 1950.
As far as the appellant assessee is concerned, it was assessed under the Indian Income tax Act from 1940 41 in respect of the income arising or deemed to arise in British India from 1940 41 onwards.
For these years income of the assessee was computed on receipt basis, but in calculating the world income, depreciation was taken into consideration for arriv ing at the income outside British India.
The assessee was also assessed for assessment year 1949 50 under the Saurash tra Income tax Ordinance, 1949.
From the assessment year 1950 51 onwards the assessee was assessed under the Indian Income tax Act, 1922 (referred to hereinafter as "the Indian Income tax Act").
The assessment years with which we are concerned are the assessment years 1957 58, 1958 59 and 1959 60, the corresponding previous years being the calendar years 1956, 1957 and 1958 respectively.
It is the case of the assessee that during the course of the assessment of the assessee 's income under the Act of 1922, depreciation was allowed for the assessment year 1950 51 and thereafter on the original cost of the assets as reduced by the deprecia tion allowance given under the Saurashtra Income tax Ordi nance, 1949.
The respective written down values for assess ment years 1951 52 and 1952 53 were fixed on the basis of the written down value for assessment year 1950 51.
However, subsequently, the Income tax Officer concerned having juris diction over the case of the petitioner, rectified the calculations of depreciation allowance by further reducing the written down value of the assets of the assessee by adopting the procedure which has been set out in paragraph 7 of the petition filed by the assessee.
What was done by the Income tax Officer was that the written down value taken for the assessment year 1940 41 by the Income tax Officer, Bombay was taken as the starting point.
From this written down value, the depreciation that was actually allowed to the assessee in respect of the assessment years 1940 41 to 1944 45 was deducted.
For the assessment years 194546 to 1948 49 the written down value was calculated after calcu lating the depreciation allowance which would be allowable under the rules.
For the assessment year 1949 50, the depre ciation allowance as calculated under the Saurashtra Income tax Ordinance, 1954 was deducted.
For the assessment years 1950 51 to 1952 53, the depreciation allowance actual ly deducted under the assessment orders passed under the Indian Income tax Act was calculated and for the assessment year 1953 54 the depreciation allowance was calculated under Rule 8 of the 8 Indian Income tax Rules made under the Indian Income tax Act.
For the assessment years 1954 55 to 1956 57 the depre ciation was calculated on the basis of the above rectifica tion order.
The contention of the assessee is that the depreciation for the previous years should have been calcu lated only on the basis of Clause (2) of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, which provided for computation of the aggregate depreciation allowance on the basis of the deduction which was actually allowed under the provisions of Saurashtra Income tax Ordi nance, 1949.
Regarding the Explanation which was added as set out earlier, the contention of the assessee was that it was ultra vires the powers of the Central Government as it was not necessary for the removal of any difficulty.
This contention of the assessee was rejected by the Income tax authorities as well as the Income tax Appellate Tribunal.
For the assessment years 1957 58 and 1959 60 the assessee again contended before the Income tax authorities and the Tribunal that Explanation to Clause (2) as notified in 1956 was ultra vires the powers of the Central Government.
It was contended by the assessee before the Tribunal that the decision of this Court in The Commissioner of Income tax, Hyderabad vs Dewan Bahadur Raingopal Mills Ltd., ; ; which upheld the validity of the Explanation was no longer good law in view of the decision of this Court in Straw Products Ltd. vs Income tax Officer.
"A" Ward, Bhopal, and Ors., The contention of the assessee was rejected by the Tribunal by its order dated April 16, 1969.
From this decision of the Tribunal at the instance of the assessee a reference was made to the Gujarat High Court in which the following ques tion was raised: "Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the depreciation allowable and not 'actually allowed ' under the Saurashtra Income tax Ordinance, 1949 should be taken into account in computing the aggregate depre ciation allowance and written down value under Section 10(2)(vi) of the Income tax Act, 1922?" This reference was numbered as Reference No. 45 of 1970.
On August 17, 1972 the High Court held that in its advisory jurisdiction under the Income tax Act it could not go into the question of the vires of the said Explanation and an swered the question against the assesee.
Thereafter the assessee filed Special Civil Application No. 1797 of 1972 from the decision wherein this appeal arises.
In this Spe cial Civil Application the vires of the Explanation added by the Central Government by its 9 notification dated May 8, 1956 in exercise of the powers under Section 12 of the Finance Act of 1950 as well as the assessments made on the assessee for the assessment years 1957 58 to 1959 60 were challenged.
The Division Bench of the Gujarat High Court in its impugned judgment pointed out that the decision of this Court in The Commissioner of Income tax, Hyderabad vs Dewan Bahadur Ramgopal Mills Ltd., had upheld the validity of the said Explanation.
The Gujarat High Court noted that the decision of this Court in Straw Products Ltd. vs Income tax Officer, arose from the merged State of Bhopal.
Some of the arguments which did not find favour with this Court in the case of The Commissioner of Income tax, Hyderabad vs Dewan Bahadur Ramgopal Mills Ltd., were accepted by a Bench of seven learned Judges of this Court in the case of Straw Products.
The Gujarat High Court pointed out that in its decision in the case of Straw Products, this Court had considered the decision in the case of Dewan Bahadur Ramgopal Mills Ltd., and explained that decision by stating that the Supreme Court was satisfied that on the facts of that case a difficulty had arisen and it was for removing that difficulty that the Order of 1956 was issued.
The Division Bench of the Gujarat High Court considered the decision of this Court in Dewan Bahadur Raingopal Mills Ltd., as binding and following the same dismissed the Special Civil Application filed by the asses see.
Mr. Salve made two submissions before us.
The first submission made by him was the same as made on behalf of the assessee before the High Court, namely, that there was no difficulty which had arisen in giving effect to the provi sions of the Indian Income tax Act in the State of Saurash tra and hence the pre condition on which the Central Govern ment was authorised to make an order under the Removal of Difficulties Order and add the Explanation had never come into existence and hence adding of the Explanation was without any authority of law and invalid and no legal ef fect.
The next submission urged by Mr. Salve was that it is the fundamental scheme of the Indian Incometax Act that, generally speaking, almost the entire cost of a capital asset used for purposes of business or profession should be allowed to be written off by way of depreciation.
This could be done in more than one ways.
It could be done by allowing a fixed percentage of the actual cost to be deducted as depreciation allowance every year till the entire cost is written off.
This is known as the Straight Line Method.
The other is the method of calculating the depreciation on the basis of written down value.
Written down value would be determined by deducting a fixed percentage of the original cost of the asset in assessment year relevant to the previ ous year in which the asset was 10 acquired and thereafter giving the same percentage of the written down value determined on the footing of the original cost less the depreciation already allowed.
Taking into account the definition of the term "written down value" contained in Section 10 of sub section (5) of Indian Income tax Act, 1922, the basic scheme under the said Act appears to be that in determining the written down value for depreciation allowance, the taxing authority can deduct only such amounts as have been allowed earlier by way :of deduc tion.
It was submitted by him that this position was accept ed in the decision of this Court in Straw Products Ltd. vs Income tax Officer.
In the present case, if the impugned Explanation was applied, the result would be that the writ ten down value of the capital asset of the assessee acquired prior to 1949 would be determined by making deductions for depreciation allowance which was not actually allowed to the assessee between the assessment years 1945 46 to 1948 49.
This result would follow from the manner in which the writ ten down value was calculated under the Saurashtra Income tax Ordinance of 1949.
It was urged by him that in exercise of its delegated powers it was not open to the Central Government to enact such an Explanation.
In order to examine this contention it would be useful to bear in mind some of the provisions of the Indian Income tax Act.
In that Act the charge of Income tax is in respect of "total income" of the previous year.
The expression "total income", very briefly stated, is defined in sub section (15) of Section 2 as meaning the total amount of income, profits and gains com puted in the manner laid down in the Act.
Chapter 3 of the Act deals with the various Heads of Income chargeable to Income tax and Section 10 deals with the Head of Income in respect of profits or gains of business, profession or vocation carried on by the assessee.
Sub section (2) of Section 10 deals with the allowances which have to be made in the computation of the profits and gains from business, profession or vocation and Clause (vi) of the said sub section provides for depreciation.
The relevant portion of Clause (vi) ran as follows: "In respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent where the assets are ships other than ships ordinarily plying on inland waters to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class or cases be pre scribed.
" The expression "written down value" as used in sub section (2) 11 of Section 10 of the Act has been defined in sub section (5) of Section 10.
The relevant part of Clause (b) of the said sub section runs as follows: "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.
X X X X Provided that in the case of a building previously the property of the asses see and brought into use for the purposes of the business, profession or vocation after the 28th day of February, 1946, 'written down value ' means the actual cost to the assessee reduced by an amount equal to the depreciation calculated at the rate in force on that date that would have been allowable had the build ing been used for the aforesaid purposes since the date of its acquisition by the assessee and had the provisions of this Act relating to the allowance for depreciation been in force on and from the date of acquisition.
" In The Commissioner of Income tax, Hyderabad vs Dewan Bahadur Ramgopal Mill Ltd., the very Explanation added by the notification dated 8.5.1956, which is challenged before us, came up for consideration before a Constitution Bench of this Court.
The facts in that case were that prior to January 26, 1950, when the erstwhile State of Hyderabad merged in the Union of India and became a Part B State, the respondent company was assessed to Income tax under the Hyderabad Income tax Act, under which depreciation allowance was given to it on the basis of the written down value of its assets, such as buildings, machinery plants, etc., in accordance with clause (c) of section 12(5) of that Act, which provided that in the case of 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 less (i) depreciation at the rates applicable to the assets calculat ed on the actual costs for the first year since acquisition and for the next year on the actual cost diminished by the depreciation allowance for one year and so on, for each year upto the commencement of that Act and (ii) depreciation actually allowed to the assessee 12 on such assets for each financial year after the commence ment of the Act.
After the merger of Hyderabad with the Union of India, by sections 3 and 13 of the Finance Act, 1950, the taxation laws in force in that State were repealed and the Indian Income tax Act, 1922, was extended to that area; and, in exercise of the powers conferred by section 12 of the Finance Act, 1950, the Central Government issued a notification dated December 2, 1950, called the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950.
Paragraph 2 of the Order provided that "in making any as sessment under the Indian Income tax Act, 1922, all depreci ation 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 the said Act".
For the assessment year 195 1 52 the respondent was assessed for the first time under the Indian Income tax Act, and basing its claim on paragraph 2 of the aforesaid Order it asked for depreciation allowance in respect of its assets by working out the value thereof at their inception and deducting therefrom such depreciation as was allowed for the three assessment years in which it was assessed under the Hyderabad Income tax Act.
By an order dated November 30, 195 1, the Incometax Officer disallowed the respondent 's claim on the ground that it was against the principle inherent in granting depreciation allowance which must decrease from year to year.
The matter was taken up to this Court and while it was pending there, on May 8, 1956, the Central Government issued a notification in exercise of its powers conferred on it by section 12 of the Finance Act, 1950, whereby an Explanation was added to the aforesaid paragraph 2 as follows: "For the purpose of this paragraph, the ex pression 'all depreciation actually allowed under any law or rules of a Part B State ' means and shall be deemed to have always meant the aggregate allowance for depreciation taken into account in computing the written down value under any laws or rules of a Part B State or carried forward under the said laws or rules.
" The respondent challenged the validity of the notification of 1956 and also its applicability to the present case on grounds (1) that it was ultra vires the powers conferred on the Central Government by section 12 of the Finance Act, 1950, (2) that it contravened Article 14 of the Constitu tion, and (3) that, in any case, it could have no retrospec tive effect.
13 It was held by this Court that the true scope and effect of Section 12 of the Finance Act, 1950 was that it was for the Central Government to determine if any difficulty of the nature indicated in the section arises and then to make such order or give such direction, as appeared to it to be neces sary to remove the difficulty, the legislature having left the matter to the executive.
In the present case, a difficulty had arisen because if depreciation actually allowed under the Hyderabad Income tax Act was taken into account in computing the aggregate depre ciation allowance and the written down value, an anomalous result would follow, namely, depreciation allowance to be allowed to the assessee in the accounting year under the Indian Income tax Act would be more than what was allowed in previous years under the Hyderabad Income tax Act.
Conse quently, the Central Government was within its power under section 12 in making the notification dated May 8, 1956.
It was also held that the notification of 1956 applied to all those to whom paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, was ap plicable and created no unequal treatment of persons in the like situation.
Accordingly, the notification did not con travene Article 14 of the Constitution.
In the course of the leading judgment, S.K. Das, J., set out the chain of events which led to the notification dated May 8, 1956 under sec tion 12 of the Finance Act, 1950 being issued which we have already set out earlier and went on to state as follows: "The basic and normal scheme of depreciation under the Indian Income tax Act is that it decreases every year, being a percentage of the written down value which in the first year is the actual cost and in succeeding years actual cost less all depreciation actually allowed under the Income tax Act or any Act repealed thereby etc.
The Hyderabad Income tax Act not having been repealed by the Incometax Act but by the Finance Act, 1950, there was a difficulty in allowing depreciation to an assessee in a Part B State in the first year of assessment under the Indian Income tax Act.
This difficulty was sought to be removed by paragraph 2 of the Removal of Difficulties Order, 1950.
If however, depreciation actually allowed under the Hyderabad Income tax Act was taken into account in computing the aggregate depreciation allowance and the written down value, an anomalous result would follow as in the present 14 case, namely, depreciation allowance to be allowed to the assessee in the accounting year under the Indian Incometax Act would be more than what was allowed in previous years under the Hyderabad Income tax Act.
This would create a disparity and be against the scheme of the Indian Income tax Act.
It was therefore necessary to explain paragraph 2 of the Remov al of Difficulties Order, 1950, to assimilate or harmonise the position regarding deprecia tion allowance, and the Explanation added in 1953 or 1956 was obviously intended to remove the difficulty arising out of that disparity or disharmony.
" It is not disputed that, if this decision is to fol lowed, both the contentions urged by the learned Counsel, Mr. Salve before us must be negatived.
The decision clearly lays down that a difficulty had come into existence and the Central Government had, in exercise of the power delegated to it, issued the said notification in 1956 adding the said Explanation to resolve the difficulty.
The Court took the view that, under the scheme of the Indian Income tax Act, in respect of assets acquired before the relevant previous year, depreciation is to be allowed on the basis of the original cost less depreciation in respect of earlier years.
viz., the years intervening between the relevant previous year and the year of acquisition.
Where any tax on income was levied during any of these intervening years, the actual cost would have to be reduced by the depreciation actually allowed but in respect of such intervening years when there was no tax levied on income, depreciation on a notional basis would have to be deducted from the actual cost of the asset.
In deducting an amount on account of such notional depreciation there seems to be nothing against the basic scheme of the Income tax Act.
These are the conclusions which flow from the said decision of Court in the case of Dewan Bahadur Ramgopal Mills Ltd. The said decision has been rendered by a Bench comprising five learned Judges of this Court and must normally be regarded as binding.
upon us.
The question, however, is whether the said decision needs to be reconsidered in view of two later decisions of this Court which we shall presently discuss.
The first of the said two decisions cited by Mr. Salve is that in the case of Madeva Upendra Sinai vs Union of India & Ors., The said decision has been rendered by majority comprising four learned Judges out of five compris ing the Bench which decided the case.
In that case, the challenge was to the validity of the second Proviso to Clause (2) of the Taxation Laws (Extension to Union Territo ries) (Removal of Difficulties) Order No. 2 of 1970 which was deemed to have come into force on 1st April, 15 1963.
In brief, this clause provided that in making any assessment under the Indian Income tax Act, 1961 all depre ciation actually allowed under the local laws shall be taken into account in computing the written down value.
The second Proviso to that Clause was as follows: "Provided further that where in respect of any period, no depreciation was actually allowed under the local law or the depreciation actu ally allowed cannot be ascertained, deprecia tion in respect of that period shall be calcu lated at the rate for the time being in force under the Income tax Act, 1961 or under the Indian Income tax Act, 1922 . . and the depreciation so calculated shall be deemed to be the depreciation actually allowed under the local law".
The majority judgment took the view that the existence or arising of a difficulty was the sine qua non for the exercise of the power under Clause (7) of the Taxation Laws (Extension to Union Territories) Regulation, 1963.
The "difficulty" contemplated by that clause had to be a diffi culty arising "in giving effect to" the provisions of the Act, etc., and not a difficulty arising aliunde or an extra neous difficulty.
Further, the Central Government could exercise the power under the clause only to the extent it was necessary for applying or giving effect to the Act, etc., and no further.
The second Proviso to Clause (2) of the said Order of 1970 sought to raise the taxable income of the assessee inconsistently with the scheme of the Income tax Act, and was ultra vires the Central Government under Clause 7 of the 1963 Regulation and the Revenue was not entitled to lay tax on the basis of the depreciation allow ance computed in accordance with that proviso.
It was fur ther held that the said second proviso to Clause (2) of the 1970 order would, in the implementation of the Act, create difficulties rather than remove them.
It was further held that the key word in Clause (b) of Section 43(6) of the Income tax Act, 1961 is "actually".
11 is the antithesis of that which is merely speculative, theoretical or imaginary.
"Actually" contra indicates a deeming construction of the word "allowed" which it qualifies.
It cannot be stretched to mean "notionally allowed" or merely allowable on a notional basis.
In Straw Products Ltd. a challenge was made to the validity of sub clause (b) of paragraph 2 of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949 inserted therein by the Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, 1962.1t was held that the said sub clause of the said Explanation was ultra vires 16 the Central Government under Section 6 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949 under which it was purported to be made, since no "difficulty" was proved to have arisen justifying the invocation of the power under Section 6; and the revenue authorities were not enti tled to levy tax on the basis of depreciation allowance computed in accordance with sub clause (b) of the said Explanation to paragraph 2 of the Order.
It was held that the expression "depreciation actually allowed" connotes under Section 10(2)(vi) of the Indian Income tax Act, 1922 under Clause (2) of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949 and the notification under Section 60A of the Income tax Act, depreciation taken into account in assessing the income of an assessee arising from carrying on business, and does not mean depreciation merely allowable or applicable under the taxing provision at p. 236).
The Court took the view that the exercise of the power under Section 6 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949 to make provisions or to issue directions as may appear necessary to the Central Government is conditioned by the existence of a difficulty arising in giving effect to the provisions of any Act, rule or order extended by Section 3 to the Merged States.
The Section does not make the arising of a difficul ty a matter of subjective satisfaction of the Government: it is a condition precedent to the exercise of power, and existence of the condition, if challenged, must be estab lished as an objective fact.
It may be mentioned that the decision in the case of The Commissioner of Income tax, Hyderabad vs Dewan Bahadur Ramgopal Mills Ltd., was noticed and discussed in this judgment but it was pointed out that in that case the difficulty had arisen because, as pointed out by the Court in that case but for the Explanation a difficulty would have arisen insofar as the depreciation allowance allowed to assessee under the Indian Income tax Act would have been more than the depreciation allowance under the Hyderabad Income tax Act.
After giving our anxious consideration to the matter, we find ourselves unable to accept the submissions of Mr. Salve, learned Counsel for the assessee.
As pointed out by us earlier, it was frankly conceded by the learned Counsel that unless we took the view that the decision of this Court in The Commissioner of Income Tax, Hyderabad vs Dewan Baha dur Ramgopal Mills Lid, was not good law or, at least, that it needed reconsideration by a larger Bench, we must follow that decision and the appeal of the assessee must be dis missed.
It is the undisputed position that the very provi sion which is challenged before us was earlier challenged before a Constitution Bench of this Court in 17 the aforementioned case and that challenge was negatived.
The mainplank of learned Counsel 's argument is that in the case of Straw Products Ltd. vs Income tax Officer, a view has been taken which is inconsistent with the view taken in The Commissioner of Income tax, Hyderabad vs Dewan Bahadur Ramgopal Mills Ltd. Now, in fact, we find that a Bench comprising seven learned Judges of this Court in this case of Straw Products Ltd. has considered the decision of this Court in Dewan Bahadur Ramgopal Mills Ltd. and has observed that the case could be distinguished because in that case there was a difficulty which had, in fact, arisen and hence, it was necessary to issue the Removal of Difficulties Order, 1956.
The observations of this Court in that case (at page 237 to 238 of the aforesaid Report) only show that this Court disapproved the interpretation given to the decision in the case of Dewan Bahadur Ramgopal Mills Ltd. by the Madhya Pradesh High Court, namely, that it was a matter for subjective satisfaction of the Government to decide whether a difficulty has arisen and it was not open to the Court to investigate that question.
It was pointed out that in Dewan Bahadur Ramgopal Mills Ltd. this Court was satisfied that, in fact a difficulty had arisen and that difficulty had to be removed and for removing the difficulty, the Order of 1956 was issued.
On a fair reading of the decision in the case of Straw Products along with the decision in the case of Dewan Bahadur Ramgopal Mills Ltd., it appears to us that the view taken in Straw Products Ltd., is that although it is for the Government to subjectively satisfy itself that a difficulty has arisen of the kind set out in those decisions before an order can be issued under the power to issue orders for removal of difficulties but that satisfaction is not conclusive as suggested by the High Court of Madhya Pradesh and it is the duty of the Court concerned to examine for itself whether there was a reasonable basis for the Government to have come to such a conclusion.
Anyway, al though it is not for the Court to determine for itself in the first instance whether such a difficulty, as contemplat ed, had arisen, it is open to the Court to see whether the Government had a sound basis to come to the conclusion that such a difficulty had arisen.
The decision in the case of Straw Products, therefore, in no way casts doubt the deci sion of this Court in Dewan Bahadur Ramgopal Mills Ltd. The other case relied upon by Mr. Salve.
namely, Madeva Sinai v, Union Of India has cast no doubt whatever on the decision of this Court in Dewan Bahadur Ramgopal Mills Ltd. but the Court there took the view that the existence of a difficulty was sine qua non for the exercise of the power in Clause 7 of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Regulation, 1963.
18 It is not disputed that the decision of the Constitution Bench of this Court in the case of Dewan Bahadur Ramgopal Mills Ltd. is binding on us.
In the light of what we have discussed earlier, we do not feel that it is necessary to direct this matter to be placed before a larger Bench so that the decision in Dewan Bahadur Ramgopal Mills Ltd., could be reconsidered.
In fact, in the case of Straw Products a larger Bench of this Court did consider that decision and came to the conclusion that on the facts of that case the decision was correct.
In view of this, we fail to see how any useful purpose would be served by referring this appeal to a larger Bench.
Moreover, problems of the type which have arisen in these cases are not likely to recur hereafter except very rarely.
In view of this, we would prefer to follow the decision in The Commissioner of Income tax Hyderabad vs Dewan Bahadur Ramgopal Mills Ltd. and the appeal of the assessee must stand dismissed.
Even apart from what we have stated in the foregoing paragraph, we may point out that in the present case, the Saurashtra Income tax Ordinance was repealed by Section 13 of the Finance Act, 1950 and not by any provision of the Indian Income tax Act.
As observed in the case of The Com missioner of Income Tax, Hyderabad vs Dewan Bahadur Ramgopal Mills Ltd. (at page 326) the basic and normal scheme of depreciation under the Indian Income tax Act is that it decreases every year, being a percentage of the written down value which in the first year is the actual cost and in succeeding years actual cost less all depreciation actually allowed under the Indian Income tax Act or any Act repealed thereby, etc.
In that case, an anomalous situation arose because the Hyderabad Income tax Act was not repealed by the Indian Income tax Act but by the Finance Act, 1950 and hence, a difficulty arose in allowing depreciation to an assessee in Part B State.
In the present case also, the Saurashtra Income tax Ordinance having been repealed not by the Indian Income tax Act but by Section 13 of the Finance Act, 1950, a similar difficulty had come into existence, and hence we fail to see how it can be said that the Government had no good basis to come to the conclusion that a difficul ty had.
in fact, arisen as contemplated in the case of Dewan Bahadur Ramgopal Mills Ltd. In the result, the appeal fails and is dismissed.
Howev er, considering the facts and circumstances of the case, there will be no order as to costs.
Y.L. Appeal dis missed.

summary:
The appellant assessee is a company carrying on the business of manufacturing and selling Textile at Porbunder (formerly a princely State) in Saurashtra in the State of Gujarat.
No income tax was levied by the former Porbunder State prior to 1948.
In 1949 the princely State of, Porbund er integrated into newly formed Saurashtra State.
In 1949 the State of Saurashtra promulgated the Saurashtra Income Tax Ordinance wherein provision for grant of depreciation based on written down value was made.
On 26.1.1950, State of Saurashtra became a part of the Union of India as a Part 'B ' State and thus the Income Tax Act, 1922 became applicable to the State of Saurashtra from 1st April 1950 under the Fi nance Act, 1950.
The said Saurashtra Income Tax Ordinance was repealed under Sec. 13 of the Finance Act, 1950.
Section 12 of that Act provided for removal of difficulties, if any, arising in giving effect to the Income Tax Act.
The Central Govt.
on 2.12.50 issued an order known as "Taxation Laws (Part B States) Removal of Difficulties) Order 1950".
Clause 2 of the said order provided the manner in which the aggre gate depreciation allowance and written down value were to be computed.
On March 9, 1953, the Central Government in the exercise of its powers under Sec.
60A of the Indian Income Tax Act, 1922, added an Explanation to the said clause (2).
The vires of the said Explanation was challenged before the Andhra Pradesh High Court which held that the Explanation referred to above was ultra vires the powers of the Central Government under Sec.
60A of the Income Tax Act.
Commissioner of Income Tax, Hyderabad vs D.B.R. Mills Ltd., Thereupon, the Central Government issued another notifi cation dated the 8th May, 1956 in exercise of its powers under Section 12 of the Finance Act 1950, whereby an Expla nation in identical terms as the earlier Explanation was added to Clause (2) of the Removal of Difficulties Order, 1950.
The validity of the said Explanation added by the notification dated 8th May, 1956 was upheld by this Court in The Commissioner of Income tax, Hyderabad vs Dewan Bahadur Ramgopal Mills Ltd., ; On the appeal from the said decision of the High Court 2 of the Andhra Pradesh in Commissioner of Income tax, Hydera bad vs D.B.R. Mills, The assessee was assessed under the Indian Income Tax Act from 1940 41 in respect of the income arising or deemed to arise in British India from 1940 41 onwards.
For these years its income was assessed on receipt basis but in calcu lating the world income depreciation was taken into consid eration for arriving at the income outside British India.
The assessee was also assessed for the assessment year 1949 50 under the Saurashtra Income Tax Ordinance, 1949.
From 1950 51 it was assessed under the Income Tax Act.
The assessment years concerned in this case are 1957 58, 1958 59 and 1959 60, the corresponding previous years being the Calender years 1956, 1957 and 1958 respectively.
The case of the assessee is that during the course of the assessment of its income, depreciation was allowed for the assessment year 1950 51 and thereafter on the original cost of the assets as reduced by the depreciation allowance given under the Sau rashtra Income Tax Ordinance 1949.
The respective written down values for the assessment years 1951 52 and 1952 53 were fixed on the basis of the written down value for the assessment year 1950 51.
But later the concerned Income Tax Officer rectified the calculations of depreciation allowance by further reducing the written down value of the assets of the assessee.
The Income Tax Officer took the written down value for the assessment years 1940 41 as the starting point.
The assessee was not satisfied with this rectification.
Its contention was that the depreciation for the previous years should have been calculated only on the basis of Clause (2) of the Taxation Laws (Part B States) (Removal of Difficulties) Order 1950, which provided for computation of the aggregate depreciation allowance on the basis of the deduction which was actually allowed under the Saurashtra Income Tax Ordinance, 1949.
Regarding the explanation, the assessee contended that it was ultra rites the powers of the Central Government as it was not necessary for the removal of any difficulty.
The contentions of the assessee were rejected by the Income Tax authorities as well as by Income Tax Appellate Tribunal.
It was contended by the assessee before the Tribu nal that the decision of this Court in Commissioner of Income Tax Hyderabad vs Dewan Bahadur Ramgopal Mills Ltd., ; was no longer good law in view of the later decision of this Court in Straw Products Ltd. vs Income Tax Officer "A" Ward, Bhopal and Ors., The Tribunal having rejected the said contentions, at the in stance of the assessee a reference was made to the Gujarat High Court in which the following question was raised: 3 "Whether on the facts and in the circumstances of the case.
the Tribunal was justified in holding that the depreciation allowable and not 'actually allowed ' under the Saurashtra Income tax Ordinance, 1949, should be taken into account in computing the aggregate depre ciation allowance and written down value under Sec.
10(2)(vi) of the Income Tax Act 1922.
" The High Court held that in its advisory jurisdiction under the Income Tax Act, it could not go into the question of the vires of the said Explanation and therefore answered the question against the assessee.
Therefore, the appellant filed Special Civil Application 1797 of 1972 in the High Court.
The Division Bench of the High Court in its judgment disposing of the said special Civil Application pointed out that the decision of this Court in the Commissioner of Income Tax, Hyderabad vs Dewan Bahadur Ramgopal Mills, case, referred to above had upheld the validity of the Explanation in question.
The High Court further opined that some of the arguments which did not find favour with this court in the said case were accepted by a Bench of 7 Learned Judges in the Straw Products Ltd. vs Income Tax Officer, "A" Ward, Bhopal and Ors., The High Court fur ther pointed out that in its decision in the said case of Straw Products this court had considered the decision in Dewan Bahadur Ramgopal Mills Ltd. and explained that on the facts of that case a difficulty had arisen and it was for removing that difficulty that the Order of 1956 was issued.
For the said reason the High Court considered that decision was good law and following the same, it dismissed the Spe cial Civil Application.
Hence this appeal by the assessee.
In this appeal the Explanation added by the Central Government by its notification dated May 8, 1956 as well as the assessments made on the assessee for the assessment year 1957 58 to 1959 60 have been assailed.
It was inter alia contended on behalf of the assessee that there was no diffi culty which had arisen in giving effect to the provisions of the Indian Income Tax Act in the State of Saurashtra and hence the pre condition on which the Central Government was authorised to make an Order under the Removal of Difficul ties Order and add the Explanation in question had never come into existence and as such the Explanation was without the authority of Law, invalid and of no legal effect.
It was further contended by the assessee that under the scheme of the Income Tax Act, generally speaking, almost the entire cost of a capital asset used for purposes of business or profession should 4 be allowed to be written off by way of depreciation, whether worked on the basis of straight line method or written down value.
The assessee disputed the mode of assessment and the applicability of the Explanation.
Following this Court 's decision in Dewan Bahadur Ramgo pal Mills ' Ltd. ; this Court dismissing the appeal, HELD: The Saurashtra Income Tax Ordinance was repealed by Section 13 of the Finance Act 1950 and not by any provi sion in the Indian Income Tax Act.
The basic and normal scheme of depreciation under the Indian Income Tax Act is that it decreases every year, being a percentage of the written down value which in the first year is the actual cost and in succeeding years actual cost less all deprecia tion actually allowed under the Income Tax Act or any Act repealed thereby etc.
[18D E] Commissioner of Income Tax Hyderabad vs Dewan Bahadur Ramgopal Mills Ltd., ; The Saurashtra Income Tax Ordinance having been repealed not by the Indian Income Tax Act but by Sec. 13 of the Finance Act 1950, a difficulty had come into existence, and hence it could not be said that the Government had no good basis to come to the conclusion that a difficulty had, in fact, arisen.
[18F G] Madeva Upendra Sinai vs Union of India & Ors., [1975] 98 I.T.R. 209.


judgement:
ivil Appeal No. 381 of 1956.
Appeal by special leave from the judgment and order dated February 24, 1955, of the Bombay High Court in Income Tax Reference No. 52/X of 1954.
N. A. Palkhivala (with him, Jamshedji B. Kanga), section N. Andley, J. B. Dadachanji, P. L. Vohra and Rameshwar Nath, for the appellant.
H. N. Sanyal, Additional Solicitor General of India, G. N. Joshi and R. H. Dhebar, for the respondent.
May 12.
The Judgment of the Court was delivered by VENKATARAMA AIYAR J.
This is an appeal against the judgment of the High Court of Bombay in a reference under section 66(1) of the Indian Income tax Act, 1922, hereinafter referred to as the Act.
The appellant is a private limited company incorporated under the Indian Companies Act, and is carrying on business as marine engineers and ship repairers.
Its registered office is in Bombay and it is resident and ordinarily resident in India.
Its entire share capital is beneficially owned by two British companies, the P. & 0.
Steam Navigation Co. Ltd., and the British Indian Steam Navigation Co. Ltd., whose business 850 consists in plying ships for hire.
Under an agreement entered into with the two companies aforesaid, which will be referred to hereinafter as the non resident companies; the appellant repairs their ships at cost, and charges no profits.
Now, the point for determination is whether, on these facts, the appellant is chargeable to tax under section 42(2) of the Act.
That sub section runs as follows: " Where a person not resident or not ordinarily resident in the taxable territories carries on business with a person resident in the taxable territories, and it appears to the Income tax Officer that owing to the close connection between such persons the course of business is so arranged that the business done by the resident person with the person not resident or not ordinarily resident produces to the resident either DO profits or less than the ordinary profits which might be expected to arise in that business, the profits derived therefrom, or which may reasonably be deemed to have been derived therefrom, shall be chargeable to income tax in the name of the resident person who shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income tax.
" The Income tax Officer, Bombay who dealt with the matter took the view that the appellant company had so arranged its business with the non resident companies that it did not produce any profits to it, and that was because it was those companies that really owned its share capital, and that therefore the profits which it could ordinarily have made but for their close financial connection were liable to be taxed under section 42(2), and he computed the same at Rs. 6,80,000 for the account year 1943 1944, at Rs. 4,67,559 for the account year 1944 1945 and at Rs. 4,68,963 for the account year 1945 46.
On the basis of the above findings, orders of assessment of income tax were made for the account years 1944 1945 and 1945 1946 and of excess profits tax for the account years 1943 1944, 1944 1945 and 1945 1946.
Against these five orders, the appellant preferred appeals to the Appellate Assistant Commissioner, who by his 851 order dated July 3, 1952, confirmed the same.
Then there was a further appeal by the appellant to the Appellate Tribunal, and the Bench which heard the same having been divided in its opinion, the matters came up for hearing before the President, who by his order dated March 19, 1954, held that section 42(2) was inapplicable and he accordingly set aside the orders of assessment of income tax and excess profits tax made on the appellant.
On the application of the Department, the Tribunal referred the following question for the opinion of the High Court of Bombay: " Whether on the facts and in the circumstances of the case any income falls to be included in the appellant 's assessment under section 42(2).
" The reference was heard by Chagla C. J. and Tendolkar J. who by their judgment dated February 24, 1955, held that, on the facts found, section 42(2) was applicable and that the appellant was liable to be assessed to income tax and excess profits tax under that section.
The appellant applied under section 66(A) for leave to appeal against this judgment to this court, and that application was dismissed.
The appellant thereafter applied for and obtained leave to appeal to this Court under article 136, and hence this appeal.
It must be mentioned that on December 31, 1948, an order of assessment bad been made in respect of the income tax payable by the appellant for the account year 1943 1944, and therein, the profits chargeable under section 42(2) had not been included.
But subsequently, the Income tax Officer took action under section 34 of the Act, and on May 29, 1953, made an order assessing the appellant to tax for that year on the profits deemed to have been made by it under section 42(2), and against that order, an appeal is pending before the Appellate Assistant Commissioner.
That order is not the subject matter of the present proceedings, which are concerned only with the assessment of income tax for the account years 1944 1945 and 1945 1946 and of excess profits tax for the account years 1943 1944, 1944 1945 and 1945 1946.
Now, the sole point for determination in this appeal is whether on the facts found the appellant is chargeable to tax under section 42 (2) of the Act.
Mr. Palkhivala, 852 learned counsel for the appellant, contends that it is not, and urges two grounds in support of his contention: (1) that section 42(2) imposes a charge only on a business carried on by a nonresident, and that therefore no tax could be imposed under that provision on the business of the appellant who is a resident; and (2) that it is a condition for the levy of a charge under s.42 (2) that the non resident must carry on business with the resident, and that in the instant case it is not satisfied.
The first ground does not appear to have been put forward in the Court below, but before us it has been presented with great elaboration and pressed with considerable insistence.
The argument in support of it may thus be stated: section 42 (2) imposes a charge on profits of a business, actual or notional, when the conditions specified therein are satisfied; but the section does not, in terms, say who the person is whose business is liable to be taxed, but that that can only be the non resident is clear from other parts of the section.
Thus, the tax is imposed under section 42 (2) on profits " derived " from business, which must mean profits actually made therein.
Ex hypothesi, the resident has so arranged his business that it produces little or no profits to him.
If it has produced some profits, then they are taxable in his hands even apart from this provision, and if he has made no profits, then the word " derived " would be inapplicable to his business.
Therefore, the profits " derived " and taxable under the section can have reference only to the business of a non resident.
Then again, the profits are chargeable under this section in the name of the resident.
If the profits chargeable under section 42(2) accrue from a business of the resident, he would be the person who would, even apart from the section, be liable for the tax, and in that situation, the expression " in the name of the resident " would be inappropriate.
It would make sense if, in fact, the profits accrued in a business carried on by a person other than the resident, and the legislature sought to tax them in his hands.
The true intention behind the legislation, it is said, is that the profits of the non resident should be taxed, but that the tax should fall on the resident by reason of his 853 close connection with the nonresident.
Support for this contention is sought in the provision in section 42 (2) that the resident shall be deemed to be the assessee for all purposes of the Act.
The word " deemed " imports, it is argued, a legal fiction, and if it was the, business of the resident that was intended to be taxed, then he is, in fact, the assessee, and it would be ' inconsistent with that position that he should be treated as an assessee by a legal fiction.
It is also urged that sub sections
(1) and (3) of section 42 deal with the profits of a nonresident and prescribe the conditions under which and the manner in which the tax could be imposed and collected, and section 42 (2) must in this setting, be construed as referring to the business of the nonresident.
There would have been considerable force in this argument, had there been any ambiguity or undertainty in the wording of section 42 (2) as to whether it is the business of the resident that is sought to be taxed or that of the nonresident.
But that is not so.
The language of the enactment imposing the charge is too plain to admit of any doubt.
Now, section 42 (2) is, it may be noted, in two parts.
The first part commencing with the opening words " Where a person not resident " and ending with the words " which may reasonably be deemed to have been derived therefrom " prescribes the conditions on which the charge arises.
It does not of itself impose the charge.
That is done by the second part, which provides that "the profits derived therefrom or which may reasonably be deemed to have been derived therefrom shall be chargeable to income tax.
" The word " therefrom " is very important for the purpose of the present discussion.
In the context, it can refer only to the business of the resident, and it is this business therefore that is the subject of the charge under section 42 (2) It was suggested for the appellant that the word therefrom " has reference to the arrangement between the nonresident and the resident, but apart from the fact that such a construction would, on the grammar of it, be untenable, :it is impossible to conceive how an arrangement relating to the conduct of business can, as such, be the 854 subject matter of income tax, apart from the business in which profits or gains are made.
The language of the section is clear beyond all reasonable doubt as to what it is that is sought to be taxed under this section.
That is only the business of the resident and not that of the nonresident.
In this view, it is only necessary to consider whether there is anything in the wording of the other parts of section 42 (2) relied on for the appellant, which precludes us from giving effect to the plain import of the word " therefrom ".
It is on the expression "profits derived" in the charging part of the enactment that the appellant leans heavily in support of his position that it is the business of the non resident that is really intended to be taxed.
But then, those words do not stand alone.
They are associated with the words " or which may reasonably be deemed to have been derived ", and this association has its origin in the preceding clause produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business ".
This clause contemplates two classes of cases, one where the business of the resident produces no profits and the other where it produces less than the normal profits.
The charge is imposed on both these classes of cases, and the word " derived " has reference to the latter, while the words " profits which may reasonably be deemed to have been derived " relate to the former.
That both these clauses relate to the business of the resident is clear from the words " to the resident " occurring therein.
The word " derived " in section 42 (2) must therefore be interpreted as referring to the business of the resident.
The respondent sought further support for this conclusion in the words " which may reasonably be deemed to have been derived" in section 42(2), and contended that those words could apply only to a business which does not yield profits, and that will fit in, in the context, only with the business of the resident and not of the non resident.
The answer of the appellant to this contention is that the words in question should be construed as meaning not notional profits but such proportion of the actual profits of the nonresident as 855 could reasonably be apportioned to the business in India.
Reliance was placed in support of this contention on Rr. 33 and 34 of the Indian Income tax Rules, 1922.
Rule 33 provides for the determination of the profits of a non resident in cases falling within section 42(1), and one of the modes prescribed for such determination is to fix an amount which bears the ' same proportion to the total profits of the non resident as the Indian receipts bear to the total receipts in the business.
Rule 34 then provides that "the profits derived from any business carried on in the manner referred to in section 42 (2) may be determined for the purposes of assessment to income tax according to the preceding rule ".
Now, the argument of Mr. Palkhivala is that the interpretation put on section 42 (2) by the rule making authorities as manifest in R. 34 is that the business chargeable under section 42 (2) is that of the non resident, and that the words " which may reasonably be deemed to have been derived therefrom " had reference to the apportionment of the Indian, out of the total profits.
We see no force in this contention.
There is nothing in R. 34 to justify the assumption that the rule making authorities considered either that section 42 (2) applied to the business of a non resident or that the words " which may reasonably be deemed to have been derived therefrom " meant apportionment of the Indian out of the world profits of the non resi.
And even if those.
be the assumptions on which the Rule is based, that can have no effect on the true interpretation of section 42 (2).
And whatever doubts one migt have had as to the meaning to be given to the words " derived therefrom or which may reasonably be deemed to have been.
derived therefrom " if they had to be construed in isolation, in the context.of the section and read in conjunction with the. words " to the resident " and " therefrom ", there cannot be any doubt that they have reference to the business of the resident and not that of the non resident.
The word " or " in the clause would appear to be rather inappropriate, as it is susceptible of the interpretation that when some profits are made but they log 856 are less than the normal profits, tax could only be imposed either on the one or on the other, and that accordingly a tax on the actual profits earned would bar the imposition of tax on profits which might have been received.
Obviously,that could not have been intended, and the word " or " would have to be read in the context as meaning " and ".
Vide Maxwell 's Interpretation of Statutes, Tenth Edn.
238 239.
But that, however, does not affect the present question which is whether the word " derived " indubitably points to the business of the nonresident as the one taxable under section 42 (2), and for the reasons already given, the answer must be in the negative.
The appellant also relied on the clauses in section 42 (2) that the profits shall be chargeable to tax in the name of the resident ' and that he shall be deemed to be the assessee for all purposes of the Act ' as indicating that it is not the business of the resident that is really sought to be taxed.
But these clauses are explainable with reference to the fact that the profits taxed are not actual profits but what are deemed to be profits.
It was argued that if it was the intention of the legislature that what was not profits should be deemed to be profits, that should have been independently provided for before the tax is imposed, and that in the absence of such a provision, the word " deemed " must be construed as referring not to notional profits being treated as actual profits, but to a person who is not, in fact, an assessee, being treated as an assessee.
We see no substance in this argument.
There is no reason why an enactment should not both declare notional profits as taxable profits and at the same time impose a charge on the resident in respect of those profits, and that, quite clearly, is what section 42 (2) has done.
It may be that its language is not felicitous.
But there can, however, be no mistaking its sense that it is the resident that is to be dealt with as assessee in respect of profits which he had not, in fact, made.
Nor do we see much force in the argument that section 42, sub sections
(1) and (3) relate to income of the nonresident and that section 42(2) which is wedged in between them should therefore be interpreted as having 857 reference to the profits of the non resident.
If the language of section 42(2) is clear that it is the resident who is chargeable to tax, it is of no consequence that under section 42, sub sections
(1) and (3) it is the non resident that is taxed.
It should be remembered that section 42 occurs in Ch.
V headed " Liability in Special Cases ", and section 42(2) is a liability which is out of the ordinary run, and it is not inappropriate to deal with it in section 42, because while section 42(1) seeks to bring within the ambit of taxation the profits of a non resident which accrue in India, section 42(2) seeks to tax the resident in respect of profits which he would have normally made but for his business association with a non resident.
On the other hand, on the construction contended for by the appellant section 42(2) would become practically useless because a non resident whose profits could be taxed under section 42(2) could also be taxed under section 42(1), as also the resident if he were the agent.
None of the considerations put forward by the appellant is of sufficient weight to displace the conclusion to be drawn from the words " to the resident " and " therefrom " in section 42(2), and we must hold that the business which is the subject matter of taxation under that provision is that of the resident and not of a non resident.
This contention must accordingly be found against the appellant.
We shall next consider the second ground urged in support of the appeal that it is a condition for the levy of a charge under section 42(2) that a non resident should carry on business with the resident, and that, on the facts found, that condition is not satisfied, and that therefore the tax is unauthorised.
It is argued that the business of the non resident companies is to ply ships for hire, and that the appellant has no concern with that; that the business of the appellant is to repair ships and that the non resident companies have no connection with that business; and that all that the non resident companies do is to get their ships repaired by the appellant, and that does not amount to carrying on any business with the appellant.
A person who regularly purchases his goods from a particular dealer does not, it is said, carry on business with 858 that dealer, and on the same analogy, in getting their ships repaired by the appellant the non resident companies cannot be said to carry on business with them in the real sense of that word.
We are unable to agree with this contention.
The word "business" is, as has often been said, one of wide import and in fiscal statutes, it must be construed in a broad rather than a restricted sense.
Discussing the connotation of the word trade", Scott L. J. observed in Smith Barry V. Cordy (1): " The history of judicial decisions has been similar, showing a strong tendency not to restrict the scope of Schedule D; a tendency which was, we think, in sympathy with the general social and economic outlook of the country.
There is hardly any activity for gaining a livelihood and not covered by the other Schedules, which does not seem to us to be swept into the fiscal net by the Schedule D." 'The word business ' connotes", it was observed by this Court in Narain Swadeshi Weaving Mills vs The Commissioner of Excess Profits Tax (2), "some real, substantial and systematic or organised course of activity or conduct with a set purpose.
" Now, it may be conceded that when a person purchases his requirements from a particular dealer, he cannot without more be said to carry on business with him.
But here there is much more.
The non resident companies send their ships for repair to the appellant, not as they might to any other repairer but under a special agreement that repairs should be done at cost.
And further unlike customers who purchase goods for their own consumption or use, the non resident companies get their ships repaired for use in what is admittedly their business.
These are clearly trading activities, organised and continuous in their character and it will be difficult to escape the conclusion that they constitute business.
We are not even concerned in this appeal with the larger question whether the activities of the nonresident companies in connection with the repair of the ships amount to carrying on of business.
What we have to decide is whether having regard to the (1) , 259.
(2) , 961. 859 course of dealings between the non resident companies and the appellant it can be said of the former that they carry on business with the latter within the meaning of section 42(2).
Now, it should be observed that section 42 speaks not of the nonresidents carrying on business in the abstract but of their carrying on business with the resident, and in the context, it must include all activities between them having relationship to their business.
That is the view taken by the learned Judges in the Court below, and we are in agreement with it.
In this connection, reference may be made to section 42(1) under which a charge is imposed on income, profits or gains accruing to a non resident through any business connection in the taxable territories.
In Commissioner of Income tax vs Curimbhoy Ebrahim & Sons (1), it was observed by the Privy Council that business connection in section 42(1) is different from business as defined in section 4(2) of the Act.
" The phrase business connection ', observed Sir George Rankin, " is different from, though not unrelated to, the word business ' of which there is a definition in the Act ".
And in Anglo French Textile Co., Ltd. vs Commissioner of Income tax, Madras (2), this Court has observed that " when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realises his profits, such relationship does constitute a business connection".
Vide also the observations in Bangalore Woollen, Cotton and Silk Mills Co. Ltd. vs Commissioner of Income tax, Madras (3 ).
The words "where a person not resident in the taxable territories carries on business with a person resident" in section 42(2) must be similarly interpreted, and a non resident should be held to carry on business with a resident, if the dealings between them form concerted and organised activities of a business character.
We are accordingly of opinion that, on the facts found, the non resident Companies must be held to have carried on business with the appellant as provided in section 42(2).
(1) (2) ; (3) [1950] 18 ; 433. 434.
860 It was argued that the result of this arrangement was only to reduce the repairing charges and enable the non resident Companies to thereby make a saving; that that was not profit or gains of a business liable to be taxed under the Act, and the decisions in Tennant vs Smith (1) and In re Major John(") were cited in sup.
port of this position.
But, as already held by us, the subject matter of the tax under section 42(2) is the business of the resident and not that of the non resident, and what we have to decide is not whether the nonresident Companies made profits in their dealings with the appellant but whether what they did was business, and for that purpose it is immaterial that the business was carried on by them in such manner that no profits could accrue to them therefrom.
Vide the observations of Coleridge C. J. at p. 113 in Commissioners of Inland Revenue vs Incorporated Council of Law Reporting (3 ).
The fact therefore that the nonresident Companies could derive no profits from the dealings with the appellant would not detract from their character as business with the appellant.
This contention must, therefore, be rejected.
It was finally contended that the profits chargeable under section 42(2) must be separately assessed and not added on to the other profits or income of the appellant.
This contention is based on the assumption that section 42(2) imposes on the appellant, a vicarious liability, the charge being in reality on the profits of the nonresident.
On our finding that the charge is on the business of the appellant and not of the non resident Companies, this contention does not survive.
In the result, the appeal fails and is dismissed with costs.
Appeal dismissed.

dataset_name: IN-Abs

summary:
Under section 42(2) Of the Indian Income tax Act, 1922, " Where a person not resident or not ordinarily resident in the taxable territories carried on business with a person resident in the taxable territories, and it appears to the Income tax Officer that owing to the close connection between such persons the course of business is so arranged that the business done by the resident person with the person not resident or not ordinarily resident produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the profits derived therefrom, or which may reasonably be deemed to have been derived therefrom, shall be chargeable to income tax in the name of the resident person who shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income tax The appellant, a private limited company carrying on business as marine engineers and ship repairers had its registered office in Bombay and was resident and ordinarily resident in India, but its entire share capital was beneficially owned by two non resident companies whose business consisted in plying ships for hire.
Under an agreement between them the ships plied for hire by the non resident companies were to be repaired by the appellant company at cost, charging no profits.
The Income tax Officer made an assessment on the appellant company under section 42(2) of the Indian Income tax Act, 1922.
It was contended for the appellant (1) that section 42(2) imposed a charge only on a business carried on by a non resident and that therefore no tax could be imposed on the business of the appellant, and (2) that it was a condition for the levy of a charge under that subsection that the non resident must carry on business with the resident and that in the instant case it was not satisfied, as all that the non resident companies did was only to get their ships repaired by the appellant company: Held, (1) that the business which is the subject matter of taxation under section 42(2) Of the Indian Income tax Act, 1922, is that of the resident and not of a non resident.
The expression 849 " derived therefrom " in that sub section refers to the business of the resident.
(2)that a person can be said to carry on a business with another if the dealings between them form concerted and organised activities of a business character.
Where, as in the instant case, the nonresident companies got their ships repaired by the appellant, not as they might by any other repairer but under a special agreement that repairs should be done by the appellant at cost, the non resident companies must be held to have carried on business with the appellant within the meaning of section 42(2) Of the Act, even though the non resident companies might have derived no profits from the dealings with the appellant.
Narain Swadeshi Weaviing Mills vs The Commissioner of Excess Profits Tax, and Commissioners of lnland Revenue vs I corporated Council of Law Reporting, , relied on.


judgement:
vil Appeal Nos.
2025 26, 2873 75, 1537 of 1986.
From the Judgment and Order dated 24.3.86 and 20.3.86 of the Kerala High Court in O.P. No. 7621/85 1, 4411/85 Y, 2785/83 G, 9366/84 1 and 4740/82 J respectively.
Soli J. Sorabjee, Dr. Y.S. Chitale, T.S. Krishnamoorthy Iyer, Harish N. Salve, K.J. John, M.N. Jha, Mrs. A.K. Verma and D.N. Misra for the Appellants.
212 V.J. Francis, N.M. PopIi and W.K. Jose for the Respondents.
The Judgment of the Court was delivered by PATHAK, CJ.
These appeals by certificate granted by the High Court of Kerala raise the question whether galvanised iron pipes and tubes are a commercially different commodity from steel tubes mentioned in section 14(iv)(xi) of the .
The appellant is a company registered under the Compa nies Act, 1956.
It has its registered office at Ahmedabad in Gujarat.
It is engaged in the manufacture and sale of steel tubes and pipes, both black and galvanised.
In the assessment proceedings for the assessment years 1982 83 and 1983 84 under the Kerala General Sales Tax Act, 1963, the appellant contended that the galvanised iron pipes manufactured by it are "declared goods" and are not liable to additional sales tax as well as surcharge.
The appel lant 's contention was not accepted by the assessing authori ty, who taxed the turnover of galvanised iron pipes at four per cent and also assessed and additional tax and surcharge treating the galvanised iron pipes as goods falling under Entry 46 of the First Schedule to the Kerala Sales Tax Act.
Demands were raised accordingly.
It appears that the matter was brought to the High Court by writ petition, and the High Court held on the basis of its decision in Apollo Tubes Limited vs State of Kerala, [1986] 61 STC 275 that the category of goods called galva nised iron pipes had acquired a different commercial identi ty as a result of the process of galvanisation and could not be identified with steel tubes mentioned in section 14(iv)(xi) of the .
Cases on the other side of the line are Associated Mechanical Industries vs Commissioner of Commercial Taxes, Bangalore, [1986] 61 STC 225 and Commis sioner of Sales Tax vs Om Engineering Works, [1986] U.P.T.C. 55.
The High Court preferred to follow its own decision and on 24 March, 1986 held against the appellant.
A certificate having been granted by the High Court these appeals are now before us.
The purpose of galvanising a pipe is merely to make it weatherproof.
It remains a steel tube.
By being put through the process of galvanising it is made rust proof.
Neither its structure nor function is altered.
As a commercial item it is not different from a steel tube.
That 213 galvanisation is done on steel tubes or pipes as a protec tive measure only was the basis of the decision of the Karnataka High Court in Associated Mechanical Industries, (supra).
Merely because the steel tube has been galvanised does not mean that it ceases to be a steel tube.
The Gujarat High Court in State of Gujarat vs Shah Veljibhai Motichand, Lunawada, [1969] 23 S.T.C. 288 held that merely because iron is given the shape of a sheet and is subjected to corruga tion does not take it out of the description of "iron and steel".
So also in Sales Tax Commissioner and Others vs Jammu Iron and Steel Syndicate, [1980] 45 S.T.C. 99 the High Court of Jammu and Kashmir held that galvanisation and corrugation do not change the essential character of iron sheets, and they remain iron sheets.
We are unable to agree with the view taken by the Madras High Court in Deputy Commissioner of Commercial Taxes, Tiruchirapalli vs P.C. Mohammed Ibrahim Marakayar Sons, [1980] 46 S.T.C. 22.
The limited purpose of galvanisation does not, it seems to us, bring a new commodity into exist ence.
The respondents rely on Deputy Commissioner of Sales Tax (Law) Board of Revenue vs
G.S. Pai & Co., [1980] 1 S.C.R. 938 but in that case this Court held that Bullion as under stood popularly does not include ornaments or other articles of gold.
It was pointed out that Bullion was commonly.
treated as a commodity distinct and separate from ornaments and articles of gold.
Gold ornaments and articles were manufactured or finished products of gold.
A number of other cases were cited on behalf of the respondents, but we do not find any of them to be of assistance to the respondents.
We are of the view that galvanised pipes are steel tubes within the meaning of section 14(iv)(xi) of the .
The view taken by the High Court is erroneous.
We may not that shortly after judgment was reserved in the present appeals, an identical point arose before a Bench of this Court on 28 April, 1988 in S.L.P. (Civil) No. 3549 of 1988 Commissioner of Sales Tax vs Mitra Industries, [1988] 69 S.T.C. Note No. 55 at p. 16 and the learned Judges took the same view which finds favour with us here.
In the result, the appeals are allowed, the impugned judgment and order of the High Court and the orders of the tax authorities in each case are set aside.
The Sales Tax Officer will now proceed to re assess the appellant in accordance with law and the observations contained in this judgment.
T.N.A. Appeals Allowed.

summary:
The appellant company was manufacturing and selling black and galvanised steel tubes and pipes.
In the assess ment proceedings for the years 1982 83 and 1983 84 under the Kerala General Sales Tax Act, 1963 the appellant contended that since the galvanised pipes manufactured by it were "declared goods" they were not liable to additional sales tax as well as surcharge.
Rejecting the contention, the assessing authority taxed the turnover of galvanized iron pipes at four per cent and also assessed an additional tax and surcharge treating the galvanized iron pipes as 'goods ' falling under Entry 46 of the First Schedule to the Kerala Sales Tax Act.
Demands were raised from the Appellant compa ny accordingly.
The Company filed a writ petition in the High Court.
The High Court, held that as a result of the process of galvani sation the galvanised iron pipes had acquired different commercial identity and therefore, could not be identified with steel tubes mentioned in Section 14(iv)(xi) of the .
In these appeals on the question: whether galvanised iron pipes and tubes are a commercially different commodity from steel tubes mentioned in Section 14(iv)(xi) of the .
Allowing the appeals and setting aside the judgment and order of the High Court, this Court, 211 HELD: 1.
Galvanised pipes are steel tubes within the meaning of Section 14(iv)(xi) of the .
The view taken by the High Court to the contrary was errone ous.
[213E] 2.
Galvanisation is done on steel tubes or pipes as a protective measure only, i.e., to make it weather proof.
Merely because the steel tube has been galvanised does not mean that it ceases to be a steel tube.
It still remains a steel tube and neither its structure nor function is al tered.
Galvanisation does not bring a new commodity into existence and as a commercial item it is not different from a steel tube.
[212H, 213A C] Commissioner of Sales Tax vs Mitra Industries, [1988] 69 S.T.C. (Note No. 55 at p. 16) applied.
Associated Mechanical Industries vs Commissioner of Commercial Taxes, Bangalore, [1986] 61 S.T.C. 225; Commis sioner of Sales Tax vs Om Engineering Works, [1986] U.P.T.C. 55; State of Gujarat vs Shah Veljibhai Motichand Lunawada, [1969] 23 S.T.C. 288 and Sales Tax Commissioner and Ors.
vs Jammu Iron and Steel Syndicate, [1980] 45 S.T.C. 99, ap proved.
Apollo Tubes Limited vs State of Kerala, [1986] 61 S.T.C. 275.
overruled.
Deputy Commissioner of Commercial Taxes, Tiruchirapalli vs P.C. Mohammed Ibrahim Marakayar Sons, [1980] 46 S.T.C. 22.
Not approved.
Deputy Commissioner of Sales Tax (Law) Board of Revenue vs G.S. Pai & Co., ; , Distinguished.