judgement:
Appeals Nos.
629 to 632 of 1964.
Appeals from the order dated September 22, 1961 of the Madhya Pradesh High Court in Misc.
Civil Case No. 277 of 1960.
A. V. Viswanatha Sastri, R. Ganapathy Iyer, B. R. G. K. Achar and R. N. Sachthey, for the appellant.
928 section T. Desai, T. A. Ramachandran, J. B. Dadachanji, for the respondent.
The Judgment Of SUBBA RAO and SIKRI, JJ. was delivered by SUBBA RAO, J. SHAH J. delivered a dissenting opinion.
Subba Rao, J.
These appeals raise the question of construc tion of the provisions of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, hereinafter called the Order, in the matter of computation of the aggregate depreciation allowances for the purpose of assessment to tax.
Nandlal Bhandari Mills Ltd., is a public company incorpo rated in Indore under the Indore Companies Act, 1914.
It owns and runs a textile mill and some ginning factories.
The Income tax Officer assessed the Company for the assessment years 1950 51, 1951 52, 1952 53 and 1953 54 on its income of the corresponding accounting years. ' being the calendar years 1949, 1950, 1951 and 1952.
In the course of the assessments it became necessary to ascertain the written down value of the building, machinery, plant etc.
of the respondent company as on January 1, 1949.
On April 1, 1950, the Indian Income tax Act, 1922, was extended to Part B States, including Madhya Bharat of which Indore became a part.
Till the said date, the assessee was for many years assessed in the Companies Circle, Bombay, as a non resident and for some years as a resident under the Indian Income tax Act, 1922.
It was also assessed to Industrial Tax under the Indore Industrial Tax Rules, 1927.
For those years in which it was assessed as a non resident under the Indian Income tax Act, 1922, only that part of its profits which could be said to be attributable to the sale proceeds of goods received in British India or in regard to which contracts were accepted in British India was brought to tax.
After the Indian Income tax Act was extended to Indore, diffi culties arose in the matter of fixing depreciation allowances, for the rates obtaining under the Indian Income tax Act and those obtaining under the Indore Industrial Tax Rules, 1927, were not the same.
After the merger of the State in the Indian Union, in order to rationalize the tax structure, the Central Government in exercise of the power conferred on it under section 12 of the Finance Act, 1950, issued the Order where under in the case of such disparity the greater of the two sums allowable was directed to be adopted.
During the assessment years, pursuant to the terms of that Order, the Income tax Officer took into account the depreciation allowances for the years up to and including 1944 as computed under the Indian Income tax Act, 1922, and for the 929 subsequent years 1945 to 1948, the depreciation allowance as computed under the Indore Industrial Tax Rules, 1927.
On that basis he arrived at the written down value of the building, plant, machinery etc.
of the assessee as on January 1, 1949.
On appeals, the Appellate Assistant Commissioner and, on further appeals, the Appellate Tribunal, confirmed the orders of the Income tax Officer.
At the instance of the assessee, the following questions, among others, were referred to the High Court of Madhya Pradesh, Jabalpur: (1) Whether the computation of the written down value of the assets of the applicant in the light of the provisions of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, is legal and valid.
(2) Whether the provisions of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, and the subsequent modifications thereof were valid in law in the light of the provisions of the Indian Income tax Act, 1922, the Finance Act, 1950, and the Constitution of India.
(3) Whether the Indore Industrial Tax Rules, 1927, could be regarded as rule or law of a Part B State for the purpose of the said Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, and, if so, whether the same are valid in law; and (4) Whether the depreciation 'actually allowed ' means the depreciation deducted in arriving at the taxable income or in arriving at the world income.
Before the High Court the third question was not pressed; and the second question was concluded by the decision of this Court in Commissioner of Income tax, Hyderabad vs Dewan Bahadur Ramgopal Mills Ltd.(1).
The correctness of the answers given by the High Court in respect of these two questions is not questioned before us and, therefore, nothing further need be said about them here.
Questions 1 and 4, in substance, form two parts of the same question.
On question 1, the High Court held that the depreciation allowed for the years up to and including 1944 in the (1) 930 assessments made in the taxable territories would be the depreciation which was actually allowed against the taxable income ,and not the depreciation computed against the total world income.
On the 4th question, it answered that the depreciation actually allowed meant the depreciation deducted in arriving at the taxable income.
The present appeals filed by the Revenue question the correctness of the answers given by the High Court in regard to questions 1 and 4 referred to it.
Mr. A. V. Viswanatha Sastri, learned counsel for the Reve nue, argued that the assessee was only entitled to depreciation on the written down value calculated after deducting all the amounts of depreciation that had been taken into consideration in determining the world income.
He argued that depreciation was allowed in respect of the user of the assets in the business '.
that the allowance did not depend on the assessable income and that the High Court, therefore, went wrong in striking a proportion on the basis of a part of the income actually assessed under the Indian Income tax Act.
Mr. Desai, learned counsel for the assessee, contended that no depreciation as such having been allowed for the years upto and including 1944 as computed under the Indian Income tax Act, the original cost itself should be taken as the written down value of the assets.
Alternatively, he argued that in any event only that part of the depreciation which had entered into the computation of income found liable to income tax under the Indian Income tax Act, which income was calculated on proportionate basis alone, should be deducted from the original cost in determining the written down value under section 10(5) (a) of the Indian Income tax Act.
We shall deal with questions 1 and 4 together, as, as we have indicated earlier, they are really parts of the same question.
The answer to the questions turns upon the interpretation of the provisions of the Order.
It is, therefore, necessary to read the relevant provisions of the Order.
Paragraph 2.
Computation of aggregate depreciation allowance and the written down value.
In making any assessment under the Indian In come tax Act, 1922, all depreciation actually allowed under any laws or rules of a Part B State relating to income tax and super tax, or any law relating to tax, on profits of business, shall be taken into account in computing the aggregate depreciation allowance refer 931 red 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.
Explanation.
For the purpose of this paragraph, the expression "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.
After the Indian Income tax Act, 1922, was extended to the Indore State, difficulties arose in the matter of fixing the allowances for depreciation.
The rates of depreciation under the Act and under the Order were not the same.
Paragraph 2 of the Order provides that in making an assessment under the Act all depreciation allowances actually allowed under the laws obtaining in the Part B State before the Act was extended to it shall be allowed.
The proviso thereto says that when there is a conflict between the two rates, the greater of the two sums allowed shall be taken into account.
The Explanation to the section defines the expression "all depreciation actually allowed under any laws or rules of a Part B State" to mean the aggregate allowances for depreciation taken into account in computing the written down value under the laws prevalent in the Part B State or carried forward under the said laws or rules.
The argument turned upon the following expressions in the said paragraph : "actually allowed" in the main part of the paragraph; "allowed in the assessment" in the proviso; and "taken into account in computing" in the Explanation.
It is true that decided cases have given a very wide meaning to the word "assessment".
It means some times "the computation of income"; sometimes, the determina tion of the amount of tax payable; and sometimes, the procedure laid down in the Act for imposing liability upon the taxpayer.
The proviso used the word "assessment" both with reference to Part B States and also with reference to taxable territories.
But we are really not concerned with the shades of meaning the said 932 word bears under the Act.
For the purpose of computing the written down value, the amount of depreciation allowed for the purpose of the assessment is only relevant.
The key to the understanding of the paragraph is the expression "allowed".
The expression "actually allowed" in the main paragraph, "allowed" in the proviso, and "taken into account" in the Explanation mean the same thing.
What the Income tax Officer has to take into consideration in computing the written down value is the depreciation actually allowed under the Income tax Act or the laws obtaining in Part B States and adopt the greater of the two sums so allowed under that head.
It was conceded that the rates under the Indian Income tax Act were higher for some years than those obtaining under the laws in force in the Indore State.
The question, therefore, is what was the amount actually allowed to the assessee towards depreciation under the Income tax Act during the years up to and inclusive of 1944.
This would depend upon the provisions of the Indian Income tax Act.
Under section 10(2) of the Indian Income tax Act, profits or gains ,of business shall be computed after making the allowances enumerated therein.
Under cl.
(vi), in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent 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 cases, to such percentage on the written down value thereof as may in any case or class of cases be prescribed be allowed.
Under section 10(5) (b), "writtendown value" means in the case of assets acquired before the 'previous year ' the actual cost to the assessee less the depreciation actually allowed to him under the Act.
Under the Indian Income tax Act, income is to be charged to tax without reference to diminution in the value of capital or the wear and tear involved in the user of the assets; but in respect of specified assets 'like building, machinery, plant and furniture etc.
, the Act grants an allowance in the manner prescribed thereunder.
Depreciation allowance is in respect of such assets as are used in the business and shall be calculated on the written down value, which means, in the case of assets acquired in the previous year, the actual cost to the assessee and, in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the Act.
The allowance towards depreciation is conditioned on the user of the assets, wholly or in part, during the accounting year and thus contributing to the earning of the income.
Though it is not unrelated to the profits, it does not 933 depend upon the increase or decrease in the earning capacity of the assets, but is only linked up with physical depreciation in their value.
Even so, only the amount of depreciation actually allowed can be deducted from the original cost of the assets to ascertain the written down value.
De hors such an allowance, it has no significance in the income tax law.
So the question is, what was allowed as depreciation by the income tax authorities in the computation of the taxable income upto and inclusive of the year 1944 ? During the said years the assessee was taxed as a non resident on the income which fell under section 4 (1) (a) or under section 4 (1) (c), read with section 42 of the Indian Income tax Act.
The assessee was only assessed during the said years in respect of that part of its profits which could be said to be attributable to the sale proceeds or goods received in British India or in regard to which contracts were accepted in British India.
Such income was brought to tax in terms of r. 33 of the Indian Income tax Rules, 1922.
Under the said rule, if the actual amount of the income, profits or gains accruing or arising to a non resident cannot be ascertained, the amount of such income, profits or gains for the purposes of assessment to income tax may be calculated on such percentage of the turnover so accruing or arising as the Income tax Officer may consider to be reasonable, or on an amount which bears the same proportion to the total profits of the business of such person, such profits being computed in accordance with the provisions of the Indian Income tax Act, as the receipts so accruing or arising bear to the total receipts of the business, or in such other manner as the Income tax Officer may deem suitable.
Under this provision the Income tax Officer could proceed thereunder only if he could not ascertain the actual amount of the income, profits or gains accruing or arising to a non resident.
If he could not, he could adopt one or other of the three methods mentioned in the rule to ascertain the said income.
Two of the said methods permit the Income tax Officer to make a reasonable or suitable estimate of such income.
But, under the third method, which was adopted in the present case, the amount of such income for the purpose of income tax shall be calculated on an amount which bears the same proportion to the total profits of the business of such person as the receipts so accruing or arising bears to the total receipts of the business.
The working out of this method may best be understood by an illustration.
Suppose the total profit of a business is Rs. 100/and the receipt in India is Rs. 25/ , i.e., the income accrued in India is one fourth of the total income.
If a sum of Rs. 51represents the depreciation of the assets used in the business and 934 if this is allowed, the total income will be Rs. 95/ ; and one fourth of Rs.95/ is Rs. 23 75 : that is the income accrued in India under this formula.
In arriving at Rs. 23.75 as the income in India, only Rs. 1.25, which is one fourth of Rs. 51 , the total depreciation, is deducted from Rs. 25/ towards the depreciation, that is to say, only.
1.25 is actually allowed towards depreciation.
The same illustration may also be put in another way.
Rs. 25/ is the gross income accrued in India to a non resident; Rs. 51 is the value of the depreciation on the total assets.
By taking one fourth of Rs. 51 , i.e., Rs. 1.25, we get at the figure of Rs. 23.75, that is to say, only one fourth of the amount representing depreciation is allowed in ascertaining the taxable income in India.
It is, therefore, manifest that the Income tax Officer, who applied the formula laid down in r. 33 of the Income tax Rules, 1922, in fixing the depreciation allowance, had actually allowed only a fraction of the amount towards depreciation allowable in assessing the world income of the assessee.
But the learned counsel for the Revenue contended that the entire depreciation of the assets was taken into consideration in computing the taxable income and, therefore, the entire amount should have been taken into account by the Income tax Officer in arriving at the written down value of the assets.
It appears that the Income tax Officer in assessing the non resident upto 1944 had, in calculating the total world income of the assessee.
allowed the entire amount of depreciation; thereafter, he arrived at the taxable income in India by the application of r. 33.
As we have pointed out, the mere fact that in the matter of calculation the total amount of depreciation was first deducted from the world income and thereafter the proportion was struck in terms of r. 33 does not amount to an actual allowance of the entire depreciation in ascertaining the taxable income accrued in India.
The Income tax Officer, as we have pointed out earlier.
could have adopted a different method by first ascertaining the gross income accrued in India and then deducting from it the allowance under the Act proportionate to the said income.
Whatever method was adopted, only a fraction of the total depreciation was actually allowed in ascertaining the taxable income in India.
Learned counsel for the assessee contended that under the method adopted in terms of r. 33 of the Income tax Rules, 1922, no depreciation was allowed at all in ascertaining the taxable income in India, for that was only taken into consideration in arriving at the total world income.
935 We cannot accept this argument we may say that the learned counsel did not press this point seriously either.
As we have indicated earlier, only a fraction of the amount of depreciation was actually allowed in the assessment of the income accrued in India.
We do not propose to express any opinion on the question whether, if the other methods suggested in r. 33 of the Rules were adopted, it could be held that no depreciation was actually allowed in making the assessment.
Our conclusion finds support in the judgment of the Bombay High Court in Hakumchand Mills Ltd. vs Commissioner of Income tax (Central), Bombay(1).
We endorse the view expressed therein.
In the result, we hold that the High Court has given correct answers to questions 1 and 4 referred to it.
The appeals fail and are dismissed with costs.
Shah, J.
The respondent, a public limited company was incorporated in the former Indian State of Indore.
The Com pany was being assessed to pay income tax in the Indore State under the Indore Industrial Tax Rules, 1927, on profits earned in its business of manufacturing cotton textiles.
In assessing tax under the Industrial Tax Rules the Tax Officer of the Indore State allowed depreciation on the assets at rates prescribed by the Industrial Tax Rules.
The Company was also assessed to tax in British India under the Indian Income tax Act, 1922, for some years as a resident and in others as a non resident.
The State of Indore became a part of the United States of Gwalior, Indore and Malwa in May, 1948, and the United States of Gwalior, Indore and Malwa became on January 26, 1950 a constituent State in the Indian Union as part of the Part B State of Madhya Bharat.
The Finance Act, 1950 by section 13 repealed the Taxation Laws in force in the territories of the Part 'B ' States.
In proceedings for assessment under the Indian Income tax Act for the assessment years 1950 51, 1951 52, 1952 53 and 1953 54, the Income tax Officer worked out the written down value of the buildings, plant and machinery of the Company on January 1, 1949 by taking into account the depreciation allowed under the Indian Income tax Act, 1922, till January 1, 1945, and thereafter the depreciation allowed under the Indore Industrial Tax Rules, and assessed tax on that footing.
The order of the Income tax (1) [1963]47 I.T.R. 949.
CI./66 13 936 Officer was confirmed by the Appellate Assistant Commissioner and the Income tax Appellate Tribunal.
The Tribunal referred under section 66(1) of the Indian Income tax Act four questions to the High Court of Madhya Pradesh at Jabalpur.
The High Court did not answer questions Nos. 2 & 3, because one of the questions in view of the judgment of this Court Commissioner of Income tax vs Dewan Bahadur Ram gopal Mills(1) did not require consideration, and the other was not canvassed.
The two other questions are : .lm15 " (1) Whether the computation of the written down value of the assets of the applicant in the light of the provisions of Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 is legal and valid ? (4)Whether the depreciation 'actually allowed ' means the depreciation deducted in arriving at the taxable income or in arriving at the world income ?" The High Court recorded on the first question the answer that depreciation allowed in the years up to and inclusive of the year 1944 in the assessment made in the taxable territories would be the.
depreciation which was actually allowed against the total income and not the depreciation computed against the total world income, and on the fourth question that the depreciation 'actually allowed ' means depreciation deducted in arriving at the taxable income.
With certificate granted by the High Court, this appeal has been preferred.
Under the Indore Industrial Tax Rules, 1927, depreciation ,was allowed at certain rates in respect of buildings, plant and machinery.
By section 10(2) (vi) of the Indian Income tax Act in computing profits or gains of a business, depreciation allowable in respect of buildings, machinery, plant and furniture used for the purpose of business being the property of the assessee, is a sum equivalent 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, at such percentage on the, written down value thereof as may in any case or class of cases be prescribed.
By sub section
(5) of section 10, written down value in sub section
(2) is defined.
By virtue of section 4A(c) a company is regarded as resident in the taxable territories in any year (i) if the control and management of its affairs is situated wholly in the taxable territories in that year, or (ii) if its income arising in the taxable territories (1) :41 I.T.R. 280 937 in that year exceeds its income arising without the taxable territories in that year.
Control and management of the affairs of the Company was at all material times situated at Indore, but in the years in which its British Indian income exceeded the income without British India, the Company was treated as resident for the purpose of the Indian Income tax Act, and in the other years it was treated as non resident.
In assessing income of the Company under the Indian Income tax Act in the years before 1950, the Income tax Officer had, whether the Company was assessed as resident or non resident, to ascertain its world income, and for that purpose to take into account the depreciation allowable under section 10(2) (vi) read with section 10 (5) (b).
Depreciation allowance in respect of the profits of the Company was therefore computed before the Indian Income tax Act, 1922, was made applicable to the territory of the State of Indore by the Finance Act, 1950, under two different statutes the Indian Income tax Act, and the Indore Industrial Tax Rules, and in the assessment year 1950 51 there were two different sets of written down values of the buildings, plant and machinery of the Company.
To remove anomalies arising from the application of the Income tax Act in the computation of taxable income of assessees from the Part B States, the Central Government issued under section 12 of the Finance Act, 1950, the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950.
Paragraph 2 of that Order as originally promulgated read as follows : "In making any assessment under the Indian Income tax Act, 1922, all depreciation actually allowed under any laws or rules of a Part B State relating to income tax and super tax, or any law relating to tax on profits of business, shall be taken into account in computing the aggregate depreciation allowance referred to in sub clause (c) of the proviso to clause (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 shalt only be taken into account.
" 938 But the expression "all depreciation actually allowed under any laws or rules of a Part B State" in paragraph 2 was ambiguous.
The Central Government purported to issue a notification under section 60A of the Indian Income tax Act incorporating an Explanation to paragraph 2, but the notification was declared by the High Court of Hyderabad as invalid: section V. Naik vs Commissioner of Income tax, Hyderabad(1). 'thereafter, the Central Government issued an amendment to the Order in exercise of the powers under section 12 of the Finance Act, 1950, and incorporated an Explanation with retrospective operation.
The Explanation which became effective from May 8, 1956, provided : "For the purpose of this paragraph, the expression "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.
" By the Explanation it was sought to evolve a method of calculation of depreciation under the law or rules in force in a Part 'B ' State : it was in effect a definition clause.
Therefore if before the application of the Income tax Act, an assessee in a Part 'B ' State was being assessed to tax only under a State law, depreciation actually allowed had to be taken into account for ascertaining the written down value of buildings, plant and machinery in the assessment year 1949 50 : if he was assessed under the Indian Income tax Act as well as the State law, in determining the appropriate written down value, the proviso to paragraph 2 had to be applied, and depreciation actually allowed under the State law had to be compared with the depreciation actually allowed under the Indian Income tax Act.
The expressions "depreciation actually allowed under any law or rule of a Part B State" in the first clause, and the expressions "depreciation has been allowed .
in the assessment in the Part B State" in the proviso have in relation to any year of assessment the same connotation.
That is common ground.
The point in dispute is about the true import of the expression "depreciation .
allowed for any year .
in the taxable territories".
The normal scheme of depreciation under the income tax Act is that depreciation progressively decreases every year, being a percentage of the written down value, which in the first year is the actual cost to the (1) 939 assessee, and in the years following the actual cost less all depreciation allowed under the Income tax Act, 1922 or any Act repealed thereby : see section 10(5) (b).
The Indore Industrial Tax Rules were, however, repealed by the Finance Act, 1950 and not by the Income tax Act, and the definition of written down value on section 10(5) (b) was in terms inapplicable, and depreciation had to be calculated under the special machinery prescribed by 'the proviso to paragraph 2 of the Taxation Laws (Part B States) Removal of Difficulties) Order, 1950, when assessment of income had been made both under the State law and the Indian income tax Act, 1922.
In determining the written down value of the buildings, plant and machinery of the Company, the Appellate Tribunal held that the expression "actually allowed" in paragraph 2 means depreciation which is availed of for the purpose of assessment of tax, and not merely a fraction of the total depreciation allowance taken into account in levying charge upon a part of the taxable income at a rate determined by the total world income.
That is stated in paragraph 10 of the judgment of the Tribunal : "The last contention of the assessee is that the Income tax Officer should not have taken the full depreciation availed of in the preceding years, but that the depreciation should be apportioned in the same manner as the income brought to assessment.
The deduction should only be made in respect of that depreciation which can reasonably be attributable to the Indian income.
We think that the law does not make any distinction as to the part of income which was brought to assessment under the Indian Income tax Act.
If depreciation has in fact been availed of by the assessee either under the Indian Income tax Act or under the Industrial Rules of the State deduction has to be made.
" The High Court did not accept this view.
They observed in paragraph 8 of their judgment ". .the depreciation in respect of an asset under the Indian Income tax Act would clearly be the 'one actually allowed as laid down in Section 10 (5) (b) and the depreciation under the Part B State 's law would also be the one actually allowed as provided in the substantive part of paragraph 2.
It follows, therefore, that under the proviso it is the greater of the two 940 depreciation allowances actually allowed that has to be taken into account in computing the written down value under section 10(5) (b).
The word "allowed" used in the proviso thus takes its colour from the expression "all depreciation actually allowed to him under this Act" as used in Section 10(5) (b) and the words "all depreciation actually allowed under any laws or rules of a Part B State" used in paragraph 2.
The "Appellate Assistant Commissioner and the Tribunal adopted this construction of the word "allowed" as used in the proviso; but inconsistently with this they held that the words "in the assessment made" used in the proviso indicated that it was the greater of the depreciation not actually allowed but taken into account against the total world income that was to be taken into account in computing the written down value under section 10(5)(b) after 1950.
We are unable to agree with this view.
The proviso has to be read with the substantive part of paragraph 2 and section 10(5)(b) and is concerned only with laying down the rule that the greater of the two depreciation allowances shall be taken into account.
" Under section 10 of the Income tax Act taxable profits or gains earned by an assessee under the head "business" after making appropriate allowances under sub section (2) have to be computed.
One of such allowances is depreciation in respect of buildings, machinery, plant and furniture being the property of the assessee and used for the purpose of the business, at such percentage on the original cost thereof to the assessee or such percentage on the written down value thereof as may in any case or class of cases be prescribed.
The view which has appealed to the High Court is that even though in determining the rate at which Lax was to be charged in respect of the income of the company as resident (subject to the deductions permissible under section 14(2) (c) or as a non resident, the entire depreciation at rates applicable under the Indian Income tax Act had to be taken into account, depreciation allowed in the taxable territories within the meaning of the proviso meant only the fraction of the total amount of depreciation calculated in determining the income, equal to the fraction which the income taxable under the Indian Income tax Act bore to the total income of the Company.
But depreciation determined according to the rules merely enters into the computation of taxable profits, whether the assessee is a 941 resident or a non resident.
In the assessment of a Company the same rates of tax apply under the Indian Income tax Act, whether the Company is resident or non resident.
If the Company is resident under section 4A(c) its entire world income would be chargeable, subject of course to special exemptions like those provided by section 14 (2) (c) : if it is non resident only a slice of that income would be chargeable.
In determining the chargeable income from business, profession or vocation and the rate applicable thereto, the same rules apply, whether the Company is taxed as resident or nonresident.
Under the scheme of the Income tax Act depreciation like any other allowance has to be allowed in computing the total profit : after the total profit is determined depreciation does not survive as a separate head of allowance.
A part only of the total profit of a Company determined in the manner prescribed by section 10 may, for reasons already mentioned, be taxable.
But total profit being determined after depreciation is allowed, between the taxable profits which may be a fraction of the total profits and depreciation there is no definable relations Therefore it is wrong to presume that the depreciation allowed in the taxable territories, which is to be taken into account under the proviso to paragraph 2 of the Removal of Difficulties Order is only a fraction of the depreciation considered for computing total profit.
The view which prevailed with the Tribunal that in deter mining the depreciation allowed within the meaning of the proviso, it is wholly immaterial that a part of the total income was chargeable to tax "if depreciation has in fact been availed of by the assessee", is in my judgment correct.
Reliance was sought to be placed upon r. 33 of the Indian Income tax Rules, by counsel for the Company in support of his plea.
The material part of the Rule is : "In any case in which the Income tax Officer is of opinion that the, actual amount of the income, profits or gains accruing or arising to any person residing out of the taxable territories whether directly or indirectly. in the taxable territories. cannot be ascertained, the amount of such income, profits or gains for the purposes of assessment to income tax may be calculated on such percentage of the turnover so accruing or arising as the Income tax Officer may consider to be reasonable, or on an amount which bears the same proportion to the total profits of the business of such 942 person (such profits being computed in accordance with the provisions of the Indian Income tax Act) as the receipts so accruing or arising bear to the total receipts of the business, or in such other manner as the Income tax Officer may deem suitable." The rule in terms applies only when the Income tax Officer cannot ascertain the actual income, profits or gains accruing or arising to any person residing outside the taxable territories.
Where from the evidence actual income can be determined the rule has no application.
Again the rule contemplates the computation of income of a non resident in three different ways : (1) on such percentage of the turnover so accruing or arising as the Income tax Officer may consider to be reasonable; (2) on an amount which bears the same proportion to the total profits of the business of such person as the receipts so accruing or arising bear to the total receipts of the business (such profit being computed in accordance with the provisions of the Indian Income tax Act); and (3) in such other manner as the Income tax Officer may deem suitable.
In the computation of income of a non resident by the second method it may be necessary to determine and allow deprecia tion.
When the first or the third method is resorted to, determination of depreciation would normally be out of place, because by the first method the income is taken as a percentage of the turnover accruing or arising, and by the third method taxable income may be determined in such other manner as the Income tax Officer deems suitable.
Paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, applies only to cases in which in making an assessment under the Indian Income tax Act depreciation allowed has to be taken into account in computing the total profits or income.
Where the question of considering the depreciation allowed does not arise, because in the method adopted determination of depreciation does not enter, paragraph 2 of necessity would have no application.
What must, however, be noticed is that in the ascertainment of total profits, either for the purposes of assessment in the ordinary manner when the income of the assessee is determinable, or where a fraction is to be adopted for the purpose of the second method contemplated by r. 33, there is no scope for assuming that only a fraction of the depreciation is actually allowed.
Depreciation is deducted once and for all, and it is deducted in determining the total profits of the business.
943 There is therefore no warrant either in section 10(2) (vi) or in paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, or in r. 33 framed under the Indian Income tax Act, for the view that depreciation allowed is a fraction of the total depreciation of the business.
I am unable to agree with the view taken by the High Court that in determining the appropriate written down value, by the application of the rule contained in the proviso to paragraph 2, only a fraction of the depreciation allowed in assessments made under the Indian Income tax Act, should be taken into account.
I record an answer on the first question in the affirmative, and on the fourth question that the depreciation actually allowed means the depreciation taken into account in arriving at the total or world income.
ORDER In accordance with the opinion of the majority, the appeals are dismissed with costs.

summary/full:
In the years prior to 1950 the respondent company with headquarters in the erstwhile state of Indore was assessed to tax under the Indore Industrial Rules, 1927 and also under the Indian Income tax Act, 1922 in so far as its income fell within sections 4(1) (a) and 4(1)(c) read with section 42 of the Act.
Depreciation had been allowed to it under the Indore Industrial Rules as well as the Indian Act.
The written down value of its assets for the purpose of 1950 51 and subsequent assessments had to be determined under the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 which laid down in the proviso to paragraph 2 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.
" The Income tax Officer found that up to and including the year 1944 the sum allowed as depreciation under the Indian Income tax Act was larger and therefore in computing written down value as on 1 1 49 he took the sum allowed as depreciation under the Indian Act up to the end of 1944 and under the Indore Industrial Rules after that date.
In the assessments made for the period up to the end of 1944 the respondent company had been treated as a non resident and its taxable income under the Indian Income tax Act had been worked out under Rule 33 of the Indian Income tax Act, 1922 as a fraction of its total world income.
In determining the total world income the depreciation claimable under the Indian Act had been allowed, and it was the full amount of this depreciation allowed against the total world income that the Income tax Officer took into account in determining the written down value of the respondent company 's assets for the purpose of the 1950 51 assessment.
The respondent company claimed that as only a fraction of the total world income had been treated as taxable income, therefore only a fraction of the depreciation allowed against the world income should be taken as having been 'actually allowed ' in the terms of paragraph 2 of the Removal of Difficulties Order.
The Income tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal having rejected this plea the matter went in reference to the High Court.
That Court took the view contended for by the respondent viz. that only the proportionate amount of depreciation which was attributable to the taxable income could be taken into account.
The Revenue appealed to this Court It was urged on behalf of the appellant that depreciation was allowed in respect of the use of the assets in the business, that the allowance did not depend on the assessable income, and that the High Court, therefore went wrong in striking a proportion on the basis of a part of the income 926 actually assessed under the Indian Income tax Act.
The different expressions used in various parts of paragraph 2 of the Removal of Difficulties Order came for consideration.
HELD : Per Subba Rao and Sikri, JJ. (i) The word "assessment" used in the proviso to paragraph 2 has been given a very wide meaning in decided cases.
It means sometimes 'the computation of income ', sometimes the determination of the amount of tax payable; and some,times the procedure laid down in the Act for imposing liability upon the tax payer.
The proviso used the word 'assessment ' both with reference to Part B States and also with reference to the taxable territories.
But in the present case the different shades of meaning of the said word were not relevant.
For the purpose of computing the written down value, the amount of depreciation allowed for the purpose of the assessment only was relevant.
[931 G H; 932 A] (ii)The key to the understanding of paragraph 2 is the expression "allowed '.
The expression 'actually allowed ' in the main paragraph, 'allowed ' in the proviso, and 'taken into account ' in the Explanation mean the same thing.
What the Income tax Officer has to take into consideration in computing the written down value is the depreciation actually allowed under the Income tax Act or the laws obtaining in Part B States and adopt the greater of the two sums so allowed under that head.
The determination of the depreciation actually allowed under the Income tax Act for the years up to and including 1944 must depend on the provisions of that Act.
[932 B] (iii)Under the Income tax Act depreciation allowance is in respect of such assets as are used in the business and shall be calculated on the written down value, which means, in the case of assets acquired in the previous year, the actual cost to the assessee, and in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the Act.
The allowance towards depreciation is conditioned an the user of the assets, wholly or in part., during the accounting year and thus contributing to the earning of the income.
Though it is not unrelated to the profits it does not depend upon the increase or decrease in the earning capacity of the assets, but is only linked up with physical depreciation in their value.
Even so only amount of depreciation actually allowed can be deducted from the original cost of the assets to ascertain the written down value.
De hors such an allowance.
, it has no significance in income tax law.
[932 F H;933 A B] (iv) During the years up to and including 1944 the assessee was taxed as a nonresident on the income which fell under section 4(1)(a) or unders.
4(1)(c), read with section 42 of the Indian Income tax Act.
The assessee was only assessed during the said years in respect of that part of its profits which could be said to be attributable to the sale proceeds or goods received in British India or in regard to which contract , were signed in British India.
Such income was brought to tax in terms of r. 33 of the Indian Income tax Rules, 1922.
The method adopted was that the amount of income for the purpose of Indian Income tax was calculated on an amount which bore the same proportion to the total profits of the business as the receipts accruing or arising in India bore to the total receipts, of the business.
By applying the formula in r. 33 the Income tax Officer had actually allowed only a fraction of the amount towards depreciation allowable in assessing the world income of the assessee.
The mere fact that in the matter of calculation the total amount of depreciation was first deducted from the world income and thereafter the proportion was struck in terms of r. 33 does not amount to an actual allowance of the entire depreciation in ascertaining the tax 927 able income accrued in India.
The Income tax Officer could have adopted a different method by first ascertaining the gross income accrued in India and then deducting from it the allowance under the Act proportionate to the said income.
Whatever method was adopted only a fraction of the total depreciation was actually allowed in ascertaining the taxable income in India.
The view taken by the High Court was therefore correct.
[933 B H] Hakumchand Mills Ltd. vs Commissioner of Income (Central) Bombay, , endorsed.
Per Shah, J. (dissenting) Under section 10 of the Income tax Act taxable profits or gains earned by an assessee under the head 'business ' after making appropriate allowances under Subs.
(2) have to be computed.
One of such allowances is depreciation in respect of the assets used for the purpose of business.
But depreciation determined according to the rules merely enters into the computation of taxable profits, whether the assessee is a resident or a non resident.
In the assessment of a company the same rates of tax apply under the Income tax Act, whether the company is resident or non resident.
If the company is resident under section 4A(c) its entire world income would be chargeable, subject of course to special exemptions like those provided in section 14(2)(c) : if it is nonresident only a slice of the income would be chargeable.
Under the scheme of the Indian Income tax Act depreciation like any other allowance has to be allowed in computing the total profit; after the total profit is determined depreciation does not survive as a separate head of allowance.
A part only of the total profit of a company determined in the manner prescribed by section 10, may be taxable.
But total profit being determined after depreciation is allowed, between the taxable profits which may be a fraction of total profits and depreciation there is no definable relation.
Therefore it is wrong to presume that the depreciation allowed in the taxable territories which is to be taken into account under the proviso to paragraph 2 of the Removal of Difficulties Order is a fraction of the depreciation considered for computing total profits.
[940 E H; 941 A D] The fact that income was computed under r. 33 made no difference.
In the ascertainment of total profits either for the purposes of assessment in the ordinary manner when the income of the assessee is determined or when a fraction is to be adopted for the purpose of the second method contemplated by section 33, there is no scope for assuming that only a fraction of the depreciation is actually allowed.
Depreciation is deducted only once and for all, and it is deducted in determining the total profits of the business.
[942B D] There is therefore no warrant either in section 10(2)(vi) or in paragraph 2 of the Removal of Difficulties Order or in r. 33 framed under the Indian Income tax Act for the view that the depreciation allowed is a fraction of the total depreciation of the business.
[942 H]


judgement:
Appeal No. 1106 of 1964.
Appeal by special leave from the judgment and order dated the October 31, 1961 of the Madras High Court in Tax Case No. 67 of 1958.
A. V. Viswanatha Sastri, R. Venkataraman and R. Gopala krishnan, for the appellant.
section T. Desai, Gopal Singh, B. R. G. K. Achar and R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by Sikri, J.
This appeal by special leave is directed against the judgment of the High Court of Judicature at Madras answering the following question of law in favour of the respondent : "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of rupees 84,633/ expended by the assessee in obtaining the loan or any part thereof is an allowable expenditure ?" The facts and circumstances of the case as stated by the Tribunal in the statement of the case are as follows : The appellant, India Cements Limited, Madras, hereinafter referred to as the assessee, is a public limited company.
The question arises in respect of the assessment year 1950 51, accounting period April 1, 1949 to March 31, 1950.
During the accounting year it obtained a loan of 40 lakhs of rupees from the Industrial Finance Corporation of India.
This loan was secured by a charge on the fixed assets of the company.
Since Mr. section T. Desai, the learned counsel for the respondent, has disputed some facts as stated by the Appellant Tribunal, it would be convenient to give these facts in the words of the Appellate Tribunal.
It is stated in the statement of the case that "the proceeds of this loan was utilised to pay off a prior debt of 25 lakhs due to Messrs A. F. Harvey Limited and Madurai Mills, Limited.
It cannot be stated definitely how the balance of 15 lakhs was used but the directors, while reporting on the accounts for the year ended 946 31 3 1949 on 4 10 1949 stated that that was utilised towards working funds.
" The expenditure of Rs. 84,633/ in connection with this loan was made up of thefollowing items : Stamps 60,02300 Registration Fee 16,,06700 Charges for certified copy of the mortgage deed 2800 Indemnity deed by Essen and Company, Limited 1500 Vakil 's fee for drafting deed 7,50000 Legal fees 1,00000 Total Rs. 84,633 0 0 The assessee did not charge this expenditure in the profits and loss account for that year.
It was shown in the Balance Sheet as mortgage loan expenses.
It continued to be so shown till March 31, 1952.
In the accounts for March 31, 1953 this was written off by appropriation against the profits of that year.
The Income Tax Officer refused to allow the deduction of Rs. 84,633/ .
He observed "As per the information furnished by the auditors, Rs. 25 lakhs of the loan was to be paid to Messrs A. F. Harvey, Limited, and Mathurai Mills, Limited in, discharge of the amount borrowed from them and utilised on the capital assets of the company.
Though in the Company 's books the amount of Rs. 84,633 was not charged to revenue but capitalised and carried forward in the Balance Sheet, for purposes of income tax, the Company 's auditors claim the same as an admissible item of revenue expenditure." He held that the expenditure was incurred in obtaining capital and should be distinguished from interest on borrowed capital which was alone admissible as a deduction under section 10 (2) (iii).
According to him, section 10 (2) (xi) specifically excludes from consideration any item of capital expenditure.
He further held that the case was not distinguishable from the decision in The Nagpur Electric Light and Power Co. vs Commissioner of Income tax, Central Provinces(1).
The Appellate Assistant Commissioner agreed with the Income Tax Officer.
The Appellate Tribunal distinguished the case of Nagpur Electric Light and Power Co. (1) 947 vs Commissioner of Income Tax(1) on the ground that in the Nagpur Electric Light(1) case money was expended for obtaining capital.
It observed as follows "Here we find the position to be different.
A study of the balance sheets of the company as at 31 3 1949 discloses the fact that the paid up capital was sufficient to cover the entire capital outlay of the company and that the further borrowal of Rs. 25 lakhs was for aug menting the working.
funds of the company.
It appears to us that even at that early stage the money was borrowed and used not for capital purposes but for augmenting the working funds of the company.
We, therefore, consider that the whole of the mortgage loan was used firstly to discharge the loan of Rs. 25 lakhs and the balance for working funds and, as such, the whole of the amount was purely for the purposes of augmenting the working capital of the company and that it could not be stated that it was used for capital purposes.
In this view of the matter, we hold that the money expended in obtaining the loan is an allowable expenditure." The High Court, after noticing the findings of the Income Tax Officer and the Tribunal preferred the findings of fact made by the Income Tax Officer.
It observed "At this stage, we may point out that the conclusion reached by the Tribunal that the money was borrowed only for working expenses and not for capital investment proceeded on an inference based upon the balance sheet.
The Tribunal did not investigate how the sum of Rs. 25 lakhs earlier borrowed from A. H. Harvey and Madurai Mills Ltd. was actually utilised.
Though in the order of the Income tax Officer it is found stated that that amount was utilised on the capital assets of the company and that statement was based on the authority of the information furnished by the auditors of the assessee, the Tribunal either overlooked or ignored this circumstance.
In the face of the statement so recorded by the Income tax Officer, the Tribunal does not appear to have been justified in relying upon inferences in ascertaining whether the earlier borrowal was on capital or revenue account." (1)6 I.T.C. 28.
948 The High Court after reviewing various cases, observed : "If we ask for what purpose the expenditure in the present case was incurred, the only answer must be that it was incurred for the purpose of bringing into existence an asset in the shape of borrowing these Rs. 40 lakhs.
The further question would then be whether this asset or advantage was not for the enduring benefit of the business and whether the expenditure incurred was one which was incurred once and for all.
The answer to both questions would again be in the affirmative.
It is true that the borrowed money has to be repaid and it cannot be an enduring advantage in the sense that the money becomes part of the assets of the company for all time to come.
But, it certainly is an advantage which the company derives from the duration of the loan and undoubtedly it could not have been for any purpose other than an advantage to the business that the borrowing was made.
That it is not enduring in the sense that the borrowing has to be repaid after a short or long period, as it were, cannot affect the conclusion that it was nevertheless an asset or an advantage that was secured.
Viewed in the light of the tests adumbrated in the above decision Assam Bengal Cement Co. Ltd. vs Commissioner of Income Tax(1) it seems to us that the expenditure must be regarded as capital expenditure.
As the facts of the case which we have set out earlier indicate, there can be no doubt that at least to the extent of Rs. 25 lakhs that amount was expended for purposes of a capital nature, clearly in order to bring into existence capital assets.
We have also pointed out that though it was vaguely stated by the Tribunal that the other sum of Rs. 15 lakhs was utilised as working funds, there seems to be no material whatsoever before the Tribunal to justify its coming to that conclusion." The learned counsel for the assessee company, Mr. A, V. Viswanatha Sastri, urges that the expenditure is admissible as a deduction under section 10(2) (xv) of the Act.
He says that the High Court erred in holding that the expenditure was made to acquire any asset or advantage of an enduring nature within the test laid down by Viscount Cave and approved by this Court in Assam, Bengal Cement Co. Ltd. vs Commissioner of Income Tax(1).
He (1) 949 further says that what was secured by the expenditure was a loan and in India money expended in raising a loan, whether by means of a debenture or a mortgage and whether you call it a loan capital or not, is not an expenditure in the nature of capital expenditure.
He further submits that the expenditure was expended wholly and exclusively for the purpose of the business of the company.
The learned counsel for the revenue, Mr. section T. Desai, supports the reasoning of the High Court.
He says that the High Court was right in preferring the findings of the Income Tax Officer on the ground that there was no material for the finding made by the Appellate Tribunal and the finding was based on surmises and material evidence was ignored.
He says that the High Court in a reference is entitled to ignore any findings of fact made by the Appellate Tribunal if those findings are vitiated.
In the alternative, he says that the question referred is wide enough to include the question whether there was any material for the finding of the Appellate Tribunal.
On the merits he contends that expenditure takes the colour from the thing on which the expenditure is made.
If the money is spent to obtain capital then the expenditure assumes the nature of capital expenditure, but if the money is spent to obtain raw materials then the expenditure takes the colour of revenue expenditure.
He further says that the borrowed money is an enduring asset and any expenditure made to obtain this money falls within the test laid down by Viscount Cave and approved by this Court.
A number of cases have been referred to during the hearing of the case by both the counsel but we do not propose to refer to all of them.
We must start first with the cases decided by this Court and see what principles have been laid down for distinguishing revenue expenditure from expenditure in the nature of capital expenditure, and especially those cases which dealt with similar problems.
We will first consider State of Madras V. G. J. Ceolho(1).
This was not a case arising under the Indian Income Tax Act but under the Madras Plantations Agricultural Income Tax Act, 1955, in which a section exactly similar to section 10 (2) (xv) existed.
In brief, the facts in that case were that the assessee had borrowed money for the purpose of purchasing the plantations and he claimed that in computing his agricultural income from these plantations the entire interest paid by him on moneys borrowed for the purpose of purchasing the plantation should be deducted as expenditure, under section 5(e) of the Act.
In (1) [1964]8 S.C.R. 60 1 ; 950 the Madras Act there was no provision similar to section 10(2) (iii) of the Act and thus interest was not expressly deductible as an allowance.
This Court applied the test formulated by Viscount ,Cave, L. C., in Atherton vs British Insulated and Helsby Cables Ltd.(1) and approved by the Court in Assam Bengal Cement Co. Ltd. vs Commissioner of Income Tax(1), and held that the payment of interest was a revenue expenditure.
It observed that "no new asset is acquired with it; no enduring benefit is obtained.
Expenditure incurred was part of circulating or floating capital of the assessee.
In ordinary commercial practice payment of interest would not be termed as capital expenditure.
" This Court further held that the expenditure was for the purpose of business.
Mr. Desai tried to distinguish that case on the ground that what was at issue was interest on loan and not expenditure incurred for ,obtaining the loan.
In our opinion, there is no justification for drawing this distinction in India.
As observed by Lord Atkinson in Scottish North American Trust vs Farmer(1) "the interest is, in truth, money paid for the use or hire of an instrument of their trade as much as is the rent paid for their office or the hire paid for a typewriting machine.
It is an outgoing by means of which the Company procured the use of the thing by which it makes a profit, and like any similar outgoing should be deducted from the receipts, to ascertain the taxable profits and gains which the Company earns.
Were it otherwise they might be taxed on assumed profits when, in fact, they made a loss.
" It will be remembered that there was no section like section 10(2) (iii) of the Act in the English Income Tax Act.
On the other hand, there were certain rules prohibiting the deduction in respect of "any capital withdrawn from, or any sum employed or intended to be employed as capital in such trade. " or "any interest which might have been made if any such sums as aforesaid had been laid out at interest." Lord Atkinson first held in that case that the express prohibitions did not apply to the facts of the case and then proceeded to discuss general principles.
These observations show that where there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which it makes a profit, is deductible from the receipts of the business to ascertain taxable income.
On the facts of this case, the money secured by the loan was the thing for the use of which this expenditure was made.
In principle, apart from any statutory provisions, we see no distinction between interest in respect of a loan and an expenditure incurred for obtaining the loan.
(1) (2)[1955] 1 S.C.R. 972 : (3)5 T.C. 693 at 707.
951 Mr. Desai urges that these observations of Lord Atkinson should be limited to a case where temporary borrowings are made.
It is true that the House of Lords. was dealing with the case of a company and the moneys that were borrowed were of a temporary character.
But this fact was only relied on to hold that the moneys secured were not 'capital ' within rule 3 of First Case, section 100 (5 and 6 Vic.
35) of the Income Tax Act, 1842, for Lord Atkinson observed at p. 706; ".
it appears to me, simply, amounts to this that the word "capital" must, in this rule, be held to bear a wholly artificial meaning differing altogether from the ordinary signification, though there be no context in the clause requiring that there should be given to it a meaning different from that which it bears in ordinary commercial transactions." He then referred to the decision in Bryon vs The Metropolitan Saloon Omnibus Company(1) to show that the borrowing by a joint stock company of money by the issue of debentures does not amount to an increasing of the capital of the company.
In Bombay Steam Navigation Co. Ltd. vs Commissioner of Income Tax(2), this Court again examined the question of distinguishing between capital expenditure and revenue expenditure.
This Court first held that on the facts of the case, cl.
(iii) of section 10(2) did not apply, because the assessee in that case had agreed to pay the balance of consideration due by the purchaser and this did not, in truth, give rise to a loan.
Then Shah, J., observed : "Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading.
The question must 'be viewed in the larger context of business necessity or expediency.
If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit earing process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure: ' (1) 3 D.G. and J. 123.
(2) ; : L8Sup.
Cl/63 14 952 We will now briefly deal with relevant decisions of the High Courts.
The first case referred is In re Tata Iron and Steel Company Ltd.(1) In that case, the Tata Iron and Steel Co. Ltd. had incurred an expenditure of Rs. 28 lakhs as underwriting commission paid to underwriters on an issue of 7 lakhs preference shares of Rs. 100/ each and the company claimed to deduct this amount as expenses under section 9 (2) (ix) of the Indian Income Tax Act (VII of 1918).
Macleod, C.J., observed: "If it is admitted that the cost of raising the original capital cannot be deducted from profit after the first year, it is dffficult to see how the cost of raising additional capital can be treated in a different way.
Expenses incurred in raising capital are expenses of exactly the same character whether the capital is raised at the flotation of the company or thereafter : The Texas Land and Mortgage Company vs William Holtham (2)".
He further observed that "as long as the law allows preliminary expenses and goodwill to be treated as assets, although of an intangible nature, the money so spent is in the nature of capital expenditure just as much as money spent in the purchase of land and machinery." The Chief Justice accordingly held that Rs. 28 lakhs could not be treated as expenditure (not in the nature of capital expenditure) solely incurred for the purpose of earning the profits of the company 's business.
Shah, J., also came to the same conclusion, and he thought that the ratio decidendi in Texas Land and Mortgage Company vs William Holtham (2 ) and the principles underlying the decision in Royal Insurance Company vs Watson(1) lent support to this conclusion.
At this stage it would be convenient to consider the Case of Texas Land and Mortgage Company vs William Holtham (2) relied on in this decision.
We have already mentioned that the statute law in England is different from the law in India and the observations of the learned Judges in the English cases must be appreciated in the light of the background of the English Income Tax Act.
In this case a mortgage company had raised money by the issue of debentures and debenture stock and incurred expenses for the issue of mortgage and placing of such debentures and debenture stock.
The Company claimed to deduct these expenses but the High Court held that the expenses could not be deducted under Schedule D of the English Income Tax Act as trading ex (1) (3) ; (2) 953 penses.
Mathew, J., gave the following reasons for disallowing the claim: "The amount paid in order to raise the money on debentures, comes off the 'amount advanced upon the debentures, and, therefore, is so much paid for the cost of getting it, but there cannot be one law for a company having sufficient money to carry on all its operations and another which is content to pay for the accommodation.
This appears to me to be entirely concluded by the decision of yesterday.
(Anglo Continental Guano Works vs Bell(1)".
In the course of arguments, Cave J., had remarked "It is only so much capital.
A man wants to raise pound 1 00,000 of capital, and in order to do that he has to pay pound 4,000.
That makes the capital pound 96,000.
That is all.
" In reply to the argument of Finlay, Q.C., that "the capital of the, company, properly so called, is the share capital" Cave, J. remarked : "To the extent that you borrow you increase the capital of the company." In our opinion, if one keeps in mind the background of the English Income Tax Act, the observations reproduced above have no relevance to cases arising under the Indian Income Tax Act.
In face of rule 3, Case 1, section 100 (5 & 6 Vict.
35) prohibiting the deduction of any expenditure in respect of any sum employed or intended to be employed as capital, Mathew and Cave, JJ.
were only concerned with the question whether the amount secured by debentures and the amount obtained by the issue of debentures and debenture stock could be called capital employed or intended to be employed within the meaning of this rule.
Rightly or wrongly, the English Courts have held that the amount obtained by the issue of debentures is capital employed within the meaning of the rule, but this does not give us any guidance in interpreting the words 'capital expenditure ' occurring in section 10 (2) (xv) of the Act.
In our opinion, the Bombay High Court was wrong in relying on Texas Land and Mortgage Company vs William Holtham(2).
But we do not say that the Tata Iron and Steel (1) (2) 954 Co. (1) case was wrongly decided.
Obtaining capital by issue of shares is different from obtaining loan by debentures.
In Nagpur Electric & Light Co. vs Commissioner of Income Tax(1), the Court of the Judicial Commissioner, Nagpur, held that expenses for raising debenture loan required for changing the system of supplying current from D.C. to A.C. and for discharging a prior loan was not allowable as deduction of the company 's assessable income.
The Judicial Commissioner followed the case of Texas Land and Mortgage Company vs William Holtham(3) and In re Tata Iron and Steel Company Ltd.(1).
After referring to these two cases, the only additional reason given was that "apart from authority it seems to us to stand to reason that money expended in obtaining capital must be treated as capital expendiure." With great respect we must hold that this case was wrongly decided.
The Kerala High Court in Western India Plywood Ltd. vs
Commissioner of Income Tax, Madras(4)held that the expenditure incurred by the company a capital expenditure and was 10(2)(xv).
The High Court Trust Company vs Jackson(5) Du#(1) and some other cases Madras(4) held that the expenditure raise a loan by debenture was therefore not deductible under section relying on European investment and Ascot Gas Water Heaters vs drew a distinction between the borrowing of capital and securing merely temporary or day to day accommodation or banking or trading facilities.
According to the High Court, the expenses for borrowing capital could not be treated as revenue expenditure.
This distinction may be valid in English Law but we are unable to appreciate how the distinction is valid under the Indian Income Tax Act.
As the decision is mainly based on this distinction and relies inter alia on In re Tata Iron and Steel Co. Ltd.(") and Nagpur Electric and Light Co. vs Commissioner of Income Tax (2 we must with respect hold that the case was wrongly decided.
In Vizagapatnam Sugars and Refinery Ltd. vs Commissioner of Income Tax(") the Andhra Pradesh High Court relying on Texas Land and Mortgage Company V. William Holtham(3) and the decision in Western India Plywood Ltd. vs C.I.T., Madras(4) held that on the facts and circumstances of that case, brokerage and commission of four annas on every maund of sugar paid by (2) (3) (1) (4) (5) (6) (7) 955 the assessee company was not revenue expenditure but capital expenditure.
In our opinion, the derision, as far as the brokerage was concerned, was wrong, but we do not say anything in this case with respect to the decision as far as the commission on sale of goods was concerned.
The Calcutta High Court examined the question in great detail in Sri Annapurna Cotton Mills Ltd. vs Commissioner of Income Tax(1), Bachawat, J., held that the loan of Rs. 10 lakhs obtained by the company was an asset or advantage for the enduring benefit of the business of the assessee.
He placed reliance on a number of cases,some of which we have already considered.
But we are unable to agree that a loan obtained can be treated as an asset or advantage for the enduring benefit of the business of the assessee.
A loan is a liability and has to be repaid and, in our opinion, it is erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount Cave and approved and applied by this Court in many cases.
Sinha, J., after referring to a number of cases, felt that the raising of capital by issue of debentures was a recognised mode of raising capital and he felt that the decided cases had laid down the proposition that borrowing money by the issue of debentures was an acquisition of capital asset and that any commission or expenditure incurred in respect thereof was of a capital nature and not to be considered as in the nature of revenue.
He was impressed by the fact that not a single case to the contrary was brought to his notice.
But we have to decide the case on principle, and with respect it seems to us that he erred in treating the loan as equivalent to capital for the purpose of section 10(2) (xv) of the Act.
In section F. Engineer vs Commissioner of income Tax (2) the Bombay High Court held that the expenditure incurred for raising loan for the carrying on of a business cannot in all cases be regarded as an expenditure of a capital nature.
On the facts of the case they held that as construction and sale of the building was the sole business of the firm and the building was its stock intrade, and the loan was raised and used wholly for the purpose of acquiring this stock in trade and not for obtaining any fixed assets or raising any initial capital or for expansion of the assessee 's business, the expenditure incurred for the raising of loan was not an expenditure of capital nature but revenue expenditure.
Although the conclusion of the High Court was correct, we are not able to agree with the principle that the nature of the expenditure incurred in raising a loan would depend upon the nature and purpose of (1) (2) 956 the loan.
A loan may be intended to be used for the purchase of raw material when it is negotiated, but the company may after raising the loan change its mind and spend it on securing capital assets.
Is the purpose at the time the loan is negotiated to be taken into consideration or the purpose for which it is actually used ? Further suppose that in the accounting year the purpose is to borrow and buy raw material but in the assessment year the company finds it unnecessary to buy raw material and spends it on capital assets.
Will the income tax officer decide the case with reference to what happened in the accounting year or what happened in the assessment year ? In our opinion, it was rightly held by the Nagpur Judicial Commissioner in Nagpur Electric Light and Power Co. vs Commissioner of Income Tax(1) that the purpose for which the new loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure.
To summarise this part of the case, we are of the opinion that (a) the loan obtained is not an asset or advantage of an enduring nature; (b) that the expenditure was made for securing the use of money for a certain period , and (c) that it is irrelevant to consider the object with which the loan was obtained.
Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2)(xv).
The last contention of Mr. Desai is that even if it is revenue expenditure, it was not laid out wholly and exclusively for the purpose of business.
Subba Rao, J., reviewed the case law in Commissioner of Income Tax vs Malayalam Plantation(1) and observed as follows : "The expression "for the purpose of the business" is wider in scope than the expression "for the purpose of earning profits.
" Its range is wide : it may take in not only the day to day running of a business but also the rationalisation of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile tide; it may also comprehend pay ment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business." (1) (2) ; 957 Mr. Desai says that the act of borrowing money in this case was not 'incidental to the carrying on of a business.
We are unable to accept this contention.
In Eastern Investments Ltd. vs Commissioner of Income Tax(") this Court held that the Eastern Investments Ltd., an investment company, when it borrowed money on debentures, the interest paid by it was incurred solely for the purpose of making or earning such income, profits or gains within the purview of section 12(2) of the Indian Income Tax Act.
It held on a review of the facts that the transaction was voluntarily entered into in order indirectly to facilitate the running of the business of the company and was made on the ground of commercial expediency.
This case, in our opinion, directly covers the present case, although Mr. Desai suggests that the case of an investment company stands on a different footing from the case of a manufacturing company.
In some respects, their position may be different but in determining the question whether raising money is incidental to a business or not, we cannot discern any difference between an investment company and a manufacturing company.
We may mention that in that case this Court was not considering whether the expenditure was in the nature of a capital expenditure or not, because it was agreed all through that the expenditure was not in the nature of capital expenditure, and the only question which this Court dealt with was whether the expenditure was incurred solely for the purpose of making or earning income, profits or gains.
The case of Dharamvir Dhir vs Commissioner of Income Tax(1) also supports the conclusion we have arrived at on this part of the case.
It was held in that case that the payment of interest and a sum equivalent to 11/16th of the profits of the business of the assessee in pursuance of an agreement for obtaining loan from the lender were in a commercial sense expenditure wholly and exclusively laid out for the purpose of the assessees business and they were, therefore, deductible revenue expenditure.
Before we conclude we must deal with the point raised by Mr. Sastri that the High Court erred in law in preferring the findings of the Income Tax Officer to that of the Appellate Tribunal.
It is not necessary to decide this question but it seems to us that in a reference the High Court must accept the findings of fact made by the Appellate Tribunal and it is for the person who has applied for a reference to challenge those findings first by an application under section 66(1).
If he has.
failed to file an application under (1) (2) ; : 958 S.66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for one reason or the other.
To conclude we hold that the expenditure of Rs. 84,633/ was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee 's business.
The answer to the question referred, therefore, must be in the affirmative.
The appeal is allowed, the judgment of the High Court set aside and the question referred answered in the affirmative.
The appellant will have its costs incurred here and in the High Court.
Appeal allowed.

dataset_name: IN-Abs

summary/full:
During the accounting period relevant for the assessment year 1950 51 the appellant company obtained a loan of 40 lakhs of rupees from the Industrial Finance Corporation of India.
The loan was secured by a charge on the fixed assets of the company.
A sum of Rs. 84,633 was shown in the Balance Sheet for the said accounting year as mortgage loan expenses; the sum was not charged as expenditure in the profit and loss account.
In the accounts for the accounting year ending March 31, 1953, this sum was written off by appropriation against profits of that year.
The Income tax Officer disallowed the deduction; he held that the expenditure was incurred in obtaining capital and should be distinguished from interest on borrowed capital which alone was admissible as a deduction under section 10(2)(iii).
In his view the expenditure was of a capital nature and therefore not admissible under section 10(2)(xv) either.
After intermediate proceedings the High Court in reference gave a finding upholding the view of the Income tax Officer.
The appellant by special leave, came to this Court.
It was contended on behalf of the appellant that : (1) the expenditure in question was not incurred to acquire any asset or advantage of an enduring nature; (2) it was applied wholly and exclusively for the purposes of the business; and (3) was admissible as a deduction under section 10 (2) (xv).
HELD : In the circumstances of the case the expenditure in question was revenue expenditure within section 10(2)(xv).
(i)When there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which it makes a profit, is deductible from the receipts of the business to ascertain taxable income.
On the facts of the instant case, the money secured by the loan was the thing for the use of which this expenditure was made.
In principle, apart from any statutory provisions, there is no distinction, as drawn by the Income tax Officer, between interest in respect of a loan and an expenditure incurred for obtaining the loan.
[950 G H] (ii)A loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee.
A loan is a liability and has to be repaid and it is erroneous to consider a liability as an asset or an advantage.
[955 C] (iii)The nature of the expenditure incurred in raising a loan cannot be made to depend on the nature and purpose of the loan.
A loan may be intended to be used for the purchase of raw material when it is negotiated but the company may after raising the lo an change its mind and spend it on securing capital assets, [955 11 956 B] 945 (iv)The loan was voluntarily entered into in order to facilitate the running of the business of the company and it could not be said that it was not laid out wholly and exclusively for the purpose of the business.
[958 B] Case law considered.