JUDGMENT M. C. DESAI C.J. - This is a statement of a case referred under section 66(1) of the Income-tax Act of 1922 at the instance of an assessee inviting this courts answer to the following question :
"Whether on a true interpretation of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, and sub-clause (b) of clause (5) of section 10 of the Indian Income-tax Act, the written down value of the assets of the assessee-company for the purpose of calculation of depreciation would be the book value of the assets worked out by the assessee or the original cost of the assets ?"
The controversy is about the depreciation to be allowed to the assessee when determining its profits and gains from the business of manufacturing alcohol and other spirits for the assessment years 1950-51, 1951-52, 1952-53 and 1953-54. The assessee is a company incorporated in the erstwhile Rampur State in 1943. Income-tax was introduced in Rampur State with effect from May 1, 1944, but on May 2, 1944, an agreement was entered into between the assessee and the Ruler of Rampur State under which the assessee was exempted from payment of all State taxes. Rampur State territory merged in India some time before April 1, 1949. On August 26, 1949, the Taxation Laws (Extension to Merged States) Ordinance No. XXI of 1949 was promulgated. Section 3 of it extended to all merged States the Indian Income-tax Act with all Rules and orders made thereunder with effect from April 1, 1949. With effect from the assessment year 1949-50 the territory became "taxable territory" within the meaning of the Indian Income-tax Act of 1922, by virtue of section 3 of the Finance Act, 1950. Under section 60A (reference to sections will henceforth be to the Income-tax Act, 1922, except where the contrary is indicated), the Central Government exempted the assessees income for the period ending on April 30, 1949, from payment of the tax. The result was that the assessee became liable to pay income-tax under the Indian Income-tax Act with effect from the assessment year 1950-51 and the income from May 1, 1949, to March 31, 1950, was assessable in the assessment year 1950-51. Section 10(2) lays down that the profits and gains of business, profession or vocation in respect of which a tax is to be paid by the person carrying on the business, profession, etc., are to be computed after making certain allowances. One of the allowances mentioned is "(vi) in respect of depreciation of.... buildings, machinery, plant or furniture" ("used for the purposes of the business, profession or vocation") "being the property of 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 many 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 of cases be prescribed." This is subject to the proviso that where in the assessment of the assessee full effect cannot be given to any such allowance in any year owing to there being no profits or gains chargeable for that year or owing to the profits or gains chargeable being less than the allowance, then the allowance or part of the allowance to which effect has not been given shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance. "Written down value" is explained in section 10(5) to mean "(a) in the case of assets acquired in the previous year, the actual cost to the assessee.... (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 Act, or any Act repealed thereby...." Section 8 of the Ordinance of 1949 empowered the Central Government to make by order "such provisions, or to give such directions, as appear to it to be necessary for removal of the difficulty" that might arise in giving effect to its provisions, and in exercise of this power the Central Government on December 3, 1949, made the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949. Section 2 of it was as follows :
"In making any assessment under the Indian Income-tax Act, 1922, all depreciation actually allowed under any laws or rules of a merged State relating to income-tax and super-tax shall be take 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."
The 1949 Ordinance was replaced by the Taxation Laws (Extension to Merged States and Amendment) Act No. 67 of 1949. By section 3 it applied the Indian Income-tax Act along with all Rules and orders made under it to all merged States with effect from April 1, 1949. Section 6 contained a provision for removal of any difficulty arising in giving effect to the provisions of the Income-tax Act or Rules or orders made thereunder to the merged States. Section 34(1) repealed the 1949 Ordinance and section 34(2) laid down that notwithstanding this repeal "anything done or any action taken in the exercise of any power conferred by it shall for all purposes be deemed to have been done or taken in the exercise of the powers conferred by this Act as if this Act were in force on the day on which such thing was done or action was taken."
The assessment order against the assessee for the assessment year April 1, 1950, to March 31, 1951, was made on December 1, 1953. The assessment orders for the next three years were made on subsequent dates. In these assessment proceedings the question arose of the depreciation to be allowed to the assessee under section 10(2) (vi) in respect of the buildings, machinery, plant and furniture used in the business by the assessee during the accounting years relevant to the assessment years. In the return for the assessment year 1950-51 submitted by it, it claimed depreciation of its assets under section 10(2) (vi) at the prescribed percentage on their written down value calculated by it after deducting depreciation at the prescribed percentage, year after year, since their purchase, as if section 10(2) (vi) had been applicable, and had been applied, since the assessment year 1943-44. The assets were originally purchased on 1942-43, relevant to the assessment year 1943-44. No income-tax was in force in 1943-44 at all. The Rampur State Income-tax Act came into force on May 1, 1944, but the assessee was exempted and, therefore, it was not liable to be assessed even under it. The Indian Income-tax Act became applicable to the assessee on April, 1949, but for the month of April, 1949, it was exempted from the liability. So up to May 1, 1949, it was not governed by the Income-tax Act and, consequently, there was no question whatsoever of its being entitled to deduct from the profits the amount of depreciation. But in order to calculate its profits for its shareholders purposes it arrived at the profits every year after deducting from the gross profits the depreciation in the value of the assets. The result was that in its accounts of every year it used to note down progressively deceasing written down values of the assets and, in its return for the assessment year 1950-51, it claimed depreciation at the prescribed percentage on the written down value of the assets noted in its accounts of the year 1949-50. When the return was taken into consideration by the Income-tax Officer it claimed that it should be allowed depreciation on the original cost of the assets reduced by depreciations actually allowed to it under the Rampur Income-tax Act and the Indian Income-tax Act in the previous assessment years, i.e., on the original cost, since no depreciation had been allowed to it under either of the Acts previously for the reasons already given and not on the written down values noted in its accounts of 1949-50. The Income-tax Officer rejected its claim on the ground that it amounted to claiming allowances admissible under section 10(2) (vi) in respect of past years and allowed it depreciation on the written down values. On appeal the Appellate Assistant Commissioner reversed the Income-tax Officers order holding that "no depreciation had been actually allowed to the appellant. The words actually allowed mean that which has been in fact allowed by the assessing authority, as opposed to that which could have been allowed or allowable under an Act.... the written down value in this case would be the cost price of the original assets". On an appeal by the Income-tax Officer, the Income-tax Appellate Tribunal restored the Income-tax Officers assessment order. It held as follows :
"The assets not having been acquired in the previous year, the Income-tax Officer could not take the cost price of such assets as the written down value.... the Income-tax Officer treated the assessees assets as having been acquired in the previous year since the assessee became liable to Indian income-tax for the first time in respect of the previous year.... There is no provision in the Income-tax Act to cover a case like this. All that could have been done and which appears reasonable is the procedure adopted by the Income-tax Officer."
Assessment orders for the succeeding assessment years 1951-52, 1952-53 and 1953-54 were passed by the Income-tax Officer as well as by the Tribunal on the basis of the assessment order for the assessment year 1950-51; depreciations were allowed in these years on the written down values calculated after deducting the depreciations allowed in the earlier year. The written down value of an asset in the accounting year 1949-50 reduced by the depreciation allowed on it in the assessment year 1950-51 and so on. Then at the instance of the assessee the Tribunal referred the case to this court.
The question formulated by the Tribunal is very improper. As framed, it is so simple that no answer other than one in the words of the definition of "written down value" in section 10(5) can be given. The written down value must vary from year to year and one answer to the question as formulated cannot be given, so as to be applicable in all the four years. Even when the original cost is the written down value it can be the written down value in only one year and in the succeeding years it must be less. The Tribunal should not, therefore, have formulated a question the answer to which does not depend upon the assessment year or the accounting year. The question assumes that under section 10(5) only two alternative courses are possible and that one course or the other is applicable in every circumstance. One of the alternative courses referred to in section 10(5) is different from the one stated in the question. If the words of the section 10(5) are not applicable to the facts of the instant case the answer to the question would be of only academic interest. Lastly, the emphasis on "true interpretation" of the 1949 Removal of Difficulties Order is misplaced. Its interpretation does not pose any problem and the difficulties that have arisen in this case have not arisen on account of the language used in it. Under section 10(5) (b) the written down value is to be calculated after deducting all depreciation actually allowed under the Indian Income-tax Act and the sole purpose behind the 1949 Removal of Difficulties Order was to be substitute in section 10(5) (b) for the words "under this Act" the words "under this Act or under a Merged State Income-tax Act". The question that arises here is whether the written down value should be calculated after deducting the depreciation, even though it was not actually allowed to the assessee on account of its being exempted from income-tax and it arises from the words used in section 10(5) and not from any words used in the 1949 Removal of Difficulties Order. I would proceed to answer the question as if it were :
"Whether the written down value of the assets of the assessee for the purpose of calculation of depreciation allowance under section 10(2) (vi) for the assessment year 1950-51 is the original cost of the assets or the original cost less all depreciation that would have been allowed to it under the Indian Income-tax Act and the Rampur State Income-tax Act if it had not been exempted from income-tax by the Central Government and the Ruler of Rampur State."
It may be assumed that the assets were purchased in 1942-43. In 1943-44 there was no income-tax in force at all. The assessees income became liable to income-tax for the first time for the assessment year 1944-45. Had it not been exempted by the Ruler and had the Rampur State Income-tax Act contained the same provisions regarding written down value and the depreciation allowance as the Indian Income-tax Act, the written down value of the assets in the accounting year 1943-44 would have been the original cost and the assessee would have been entitled to depreciation allowance at the prescribed percentage on it. Suppose the original cost was Rs. 1,00,000 and the prescribed percentage was 10, then for the assessment year 1944-45 the assessee would have been entitled to deduct Rs. 10,000 as depreciation allowance from its profits and the written down value of the assets for the succeeding assessment year 1945-46 would have been Rs. 90,000. In the assessment year 1945-46 it would have been entitled to deduct Rs. 9,000 as depreciation allowance and the written down value for the succeeding assessment year 1946-47 would have been Rs. 81,000. In this way the written down value for the assessment year 1950-51 would have been roughly Rs. 53,140 on which it would be entitled to depreciation allowance of Rs. 5,314. This allowance that is conceded by the income-tax department whereas it claims allowance of Rs. 10,000 on the original cost of Rs. 1,00,000. Since it was never assessed to income-tax prior to the assessment year 1950-51 there had never been any occasion for its being allowed any deprecation allowance in the previous years. So it claimed that there was nothing to be deducted from the original cost in order to arrive at the amount of the written down value for the assessment year 1950-51. Under section 10(5) written down value is either the original cost or the original cost less all depreciation actually allowed under the Indian or the Rampur State Income-tax Act; there is no third alternative. The first alternative is applicable only when the assets were acquired earlier. There are only two possibilities : (1) that the assets were acquired in the previous year, and (2) that they were acquired earlier; in the former case the actual cost is the written down value and in the latter case the actual cost less all depreciation actually allowed under an Income-tax Act. The assets in the instant case were acquired in 1942-43 and in any case, prior to 1949-50, the previous year relevant to the assessment year in question. Therefore, the written down value had to be the original cost less all depreciation actually allowed under the Income-tax Acts. The sole question is whether any depreciation was "actually allowed" under any Income-tax Act within the meaning of section 10(5) (b). The answer is, strictly according to the facts, "no". No income-tax was payable by the assessee previous to the assessment year 1950-51 and, consequently, there had been no occasion for its being allowed depreciation in the previous years. The written down value of the assets in the accounting year 1949-50 was the original cost less nil, i.e., the original cost.
The argument advanced on behalf of the Commissioner of Income-tax that the original cost can be the written down value only when the assets were acquired in the accounting year is not quite correct; if the assets were acquired in the accounting year the original cost will certainly be the written down value but the original cost can be written down value even if the assets were acquired earlier. What is required to be deducted from the original cost under section 10(5) (b) is the depreciation which might have been allowed to him under the Income-tax Acts if he was liable to pay income-tax. The question of allowing depreciation arises only when for the purpose of assessing income-tax the profits and gains of the business are to be computed. If no income-tax is payable whether on account of exemption or other-wise, the profits and gains of the business are not required to be computed and there is no occasion for allowing depreciation. There is, therefore, a clear distinction between depreciation actually allowed and depreciation which would have been allowed if the profits and gains of the business had to be computed for assessment of income-tax and under section 10(5) (b) the written down value is calculated after deducting from the original cost only that depreciation that has actually been allowed in the computation of the profits and gains of the business during proceedings for assessment of income-tax in earlier years. As the assessees profits and gains from the business had never been computed previously and, therefore, no depreciation had actually been allowed to it, there was nothing to be deducted from the original cost of the assets in order to determine their written down value for the assessment year 1950-51. The word "actually" used in section 10(5) (b) was not redundant and must be given its full effect. Depreciation deemed to have been allowed or which might have been allowed if the profits and gains of business had been assessed to income-tax in previous years is certainly not depreciation "actually allowed" and cannot be deducted from the original cost.
The assessee while calculating its profits and gains of business went on depreciating the value of the assets year after year and it was contended on behalf of the Commissioner of Income-tax that this amounted to depreciation being actually allowed. The assessee went on deducting the depreciation from its profits only for the purpose of its calculating what profits were divisible to shareholders. It itself deducted the depreciation every year from the profits and this deduction by itself does not amount to depreciation being "allowed" to it under the Income-tax Acts. The depreciation that is deducted every year from its profits was not deducted under any provision of any Income-tax Act. The only depreciation allowed under an Income-tax Act is the depreciation allowed by any Income-tax Officer when computing its profits and gains of business for assessment purposes. "Actually allowed" mean allowed by an income-tax authority; depreciation claimed by the assessee itself in its own accounts is not depreciation allowed to it.
Unabsorbed depreciation, e.g. depreciation which cannot be deducted from profits and gains of the business because there is a loss, is not deemed to be actually allowed. If written down value of assets in a year is Rs. 100 and the prescribed percentage of depreciation is Rs. 10, Rs. 10 will be from the profits of the year. But if there were no profits in the year there was nothing from which Rs. 10 could be deducted and from the next years profits, if any, Rs. 10 will be deducted in addition to the depreciation of the next year. This means that depreciation was not actually allowed in the first year. Similarly, depreciation is not actually allowed when there is no assessment of income-tax and consequently, no computation of profits and gains of the business.
Nothing depends upon the fact that the assessees accounts and returns themselves show reduced values of the assets. There is no question of an estoppel because the income-tax authorities did not alter their position to their detriment on account of these entries in the accounts and returns. There can be no estoppel against a statute and it was open to the assessee to claim that in calculating the written down value of the assets for purposes of assessment nothing had to be deducted from their original cost even though it had for its own purposes gone on gradually reducing their book value. As I pointed out, only that depreciation is to be deducted which was actually allowed by the income-tax authority while calculating for the purpose of assessing income-tax, the profits and gains of the assessees business under an Income-tax Act. Any depreciation claimed by an assessee but not allowed as mentioned above is not deducted. All depreciations entered by the assessee in its accounts of previous years were simply depreciations claimed by it but not actually allowed. It is for an income-tax authority to compute the profits and gains of the business and it is bound to calculate the written down value as provided in section 10(5). It is governed by the statute and not by what the assessee has written in the accounts and returns. It is not correct that it could accept any proof of written down value and that it could not accept the book value given in the accounts of the assessee as the written down value. It could not accept the book value as the written down value after the assessee had proved that no depreciation had actually been allowed to it under any Income-tax Act in the previous years and that consequently the book value was not legal written down value. Had there been no proof that the assessee had not actually been allowed any depreciation in the previous years the book value entered by it in its accounts could have been accepted by an income-tax authority as the written down value but not otherwise.
The assessee referred us to Commissioner of Income-tax v. Kamala Mills Ltd., Vankadam Lakshminarayana v. Commissioner of Income-tax, Nandlal Bhandari Mills Ltd. v. Commissioner of Income-tax and Dharampur Leather Cloth Co. Ltd. v. Commissioner of Income-tax. In the first case of Kamala Mills Ltd., in the accounting year 1941, no depreciation was allowed on the written down value because the business suffered a loss and Das and Mukherjea JJ. of the Calcutta High Court held that the written written down value in the next accounting year 1942 was the same as in the accounting year 1941, because no depreciation had actually been allowed. The learned judges observed at page 134 :
"The words actually allowed are unambiguous and connote the idea the allowance was in fact given effect to.....
In the present case, as there was loss, the depreciation allowance of Rs...... was not set off and cannot be said to have been actually allowed."
There is no distinction between a depreciation not set off on account of a loss and a depreciation not set off because of exemption from income-tax and if in one case the depreciation cannot be said to have been actually allowed, in other case it cannot be said to have been actually allowed. In the second case (of Vankadam Lakshminarayana), Chandra Reddy C.J. and Kumaraiah J. said at page 530 with regard to the words "depreciation actually allowed" that :
"Having regard to that language, we do not think that we will be justified in taking into account the notional allowance that might be admissible under the clauses. The legislature has advisedly used the words actually allowed to the assessee. If the intendment of the legislature was that the whole of the depreciation allowance permissible under those clauses were to be taken into account, surely it would have used appropriate language to convey that thought. We cannot assume that the legislature was not aware of the distinction between depreciation allowable to an assessee and depreciation allowed to him as used in clause (b) of section 10(5)... That the legislature bore always in mind the difference between the expressions what is actually allowed and what is allowable could also be gleaned from section 9(1) (iv) in which the word payable is used and section 10(5) which defines paid as actually paid. The notion of actual payment is emphasised there. All these indications are pointers to the conclusion that it is only such depreciation as are in fact granted to an assessee that should enter in the determination of the written-down value."
In the third case (of Nandlal Bhandari Mills), Dixit C.J. and Pandey J. observed at page 477 :
".... that the depreciation actually allowed means the depreciation deducted in arriving at the taxable income."
The facts in the last case (of Dharampur Leather Cloth Co. Ltd.) were similar to those in the instant case. The assessee in that case also was exempted from income-tax and it was held that, since no depreciation had been allowed actually, the actual cost of the assets was written down value. It was pointed out that the assessee had not filed any return and had not claimed any depreciation and supplied any particulars without which no claim to depreciation would have been entertained. Tambe and Desai JJ. relied upon the decision in Kamala Mills Ltd. and held that the assessee was entitled to claim depreciation on the actual cost of the assets.
While this reference was pending here, the 1949 Removal of Difficulties Order was amended on August 20, 1962, by the Taxation Laws (Merged States) (Removal of Difficulties) Amendment Order, 1962. Section 2 of it reads as follows :
"In the Taxation Laws (Merged States) (Removal Difficulties) Order, 1949, after the proviso to paragraph 2, the following Explanation shall be inserted, namely :
Explanation. - For the purpose of this paragraph, the expression all depreciation actually allowed under the laws or rules of a Merged State means and shall be deemed always to have meant -
(a) the aggregate allowance for depreciation taken into account in computing the written down value under any laws or rules in force in a merged State or carried forward under the said laws or rules, and
(b) in cases where income had been exempted from tax under any laws or rules in force in a merged State or under any agreement with a ruler, the depreciation that would have been allowed had the income not been so exempted."
The Income-tax Act of 1922 was replaced by the Income-tax Act, No. 43 of 1961. Section 32 of it deals with depreciation allowance and section 43 explains "actual cost" and "written down value." Section 297 of it repeals the Income-tax Act of 1922, but keeps it alive in respect of a return to income filed before the commencement of the 1961 Act, e.g., April 1, 1962, by any person for any assessment year and assessment proceedings would be taken and continued as if the 1922 Act were in force. The new Act is to apply in respect of a return of income filed after April 1, 1962, otherwise than in pursuance of a notice issued under section 34 of the repealed Act for the assessment year ending on March 31, 1962, or any earlier year. It also keeps the 1922 Act alive in respect of any proceeding pending on April 1, 1962, before any income-tax authority, the Appellate Tribunal or High Court by way of appeal, reference or revision; the proceeding will continued and disposed of as if the 1922 Act were in force. If in respect of any assessment year (after the year ending on March 31, 1940) a notice under section 34 of the 1922 Act was issued prior to April 1, 1962, the proceedings in pursuance of it are to be continued and disposed of as if that Act were still in force, but where in respect of any assessment year after 1939-40 any income chargeable to tax has escaped assessment a notice under the 1962 Act may be issued, if no proceedings under section 34 of the 1922 Act were taken, and the new Act will apply the proceedings. Section 298 provides as follows :
"(1) If any difficulty arises in giving effect to the provisions of this Act the Central Government may, by general or special order, do anything not inconsistent with such provisions which appears to it to be necessary or expedient for the purpose of removing the difficulty.
(2) In particular..... any such order may provide for the adaptations or modifications subject to which the repealed Act shall apply in relation to the assessments for the assessment year ending on the 31st day of March, 1962, or any earlier year."
It was in the exercise of the power granted under this section that the 1962 Removal of Difficulties Amendment Order was made. The first question that arises is whether this court can take into consideration the 1962 Removal of Difficulties Amendment Order in answering the question arising out of the statement of the case. The Amendment Order of 1962 is not retrospective in operation. It has added an Explanation to section 2 of the 1949 Removal of Difficulties Order and whatever may be the words used in the Explanation it has been added only prospectively and not with retrospective effect. The Explanation is to be read only in a case which is governed by the Amendment Order and the Amendment Order governs future cases and pending cases and pending cases but does not govern past or closed cases. The Explanation deals with the definition of "written down value" in section 10(5). The question what was the written down value in the instant case should be said to be pending so long as the assessment proceedings were pending either before the Income-tax Officer or before the Appellate Assistant Commissioner or before the Tribunal. When the Tribunal decided the appeal its order became final. But there was no finality in respect of any question of law decided by it and its decision was subject to the judgment passed by this court on reference. The reference, however, had to arise out of the order passed by it; no question not decided by it could be referred by it to this court and this court has no jurisdiction whatsoever to decide it. All question decided in accordance with the law then existing and, therefore, the only question that could be referred by it to this court and can be answered by this court is a question relating to the law existing when the Tribunal decided the appeal. When it decided the appeal the Explanation did not exist and, therefore, the question what is the written down value in the instant case must be decided by this court on the basis of the law existing when the Tribunal decided the appeal and not on the basis of the law contained in the 1962 Amendment Order. According to the Explanation, "all depreciation actually allowed" shall be deemed always to have meant in cases where income had been exempted from tax, the depreciation that would have been allowed had the income not been so exempted. But this is the effect only after August 20, 1962, when the Amendment Order was made. If the Central Government had intended this to be the effect always it should have added the Explanation with retrospective effect; it should have used some such words as, "the following Explanation shall be, and shall always be deemed to have been, inserted". There is a clear distinction between saying that the Explanation shall always be deemed to have been inserted and providing in the Explanation that certain words shall be deemed always to have meant a certain thing; in the former case whatever is contained in the Explanation would always be deemed to be there whereas in the latter case what is contained in the Explanation would on and after the date on which the Explanation is enacted be always deemed to be there. Had the Explanation been in existence when the Tribunal decided the appeal it would have been bound to treat the depreciation that would have been allowed if the income had not been exempted as depreciation actually allowed. If a case arises before a Tribunal after August 20, 1962, it would be similarly bound. Here the Tribunal was not governed by the Explanation for the simple reason that it did not exist (and was not deemed to exist) when it disposed of the appeal and, therefore, it would be futile to consider what it contains. If the Explanation was not applicable its contends are irrelevant. Since this court has no jurisdiction to consider any question of law not considered by the Tribunal and, therefore, not arising out of the case submitted by it, it cannot consider the Explanation and cannot answer the question after giving effect to it. Its position is different from that of an appellate court or even a court of revision; its jurisdiction is very limited, it being confined to answering a question of law arising out of the order passed by the Tribunal on appeal whether the 1962 Amendment Order is applicable in the instant case or not is itself a question of law and is a question of law that does not arise out of the order passed by the Tribunal or the statement of the case submitted by it. This court cannot consider the Explanation unless it holds first that the Explanation is applicable and if it is precluded from deciding that it is applicable it follows that is cannot consider it.
According to the Explanation the depreciation that would have been allowed if the income had not been exempted is to be treated as depreciation actually allowed. What depreciation would have been allowed raises some questions of fact, namely, what assets were used in the business and for what period, what was the law in the Rampur State Income-tax Act regarding depreciation and written down value and what were the percentages fixed by the Rampur State for allowing depreciation of written down values of different kinds of assets. Foreign law is a question of fact. None of these question can be answered by the court, firstly, because they are of a fact and, therefore, outside its jurisdiction and, secondly, because there is or may be no relevant evidence and the statement of the case also does not refer to any relevant evidence. The accounts and the returns submitted by the assessee do not constitute relevant evidence on these issues; they are evidence of only what the assessee claimed and not of what the Rampur law and orders were. Without answering these questions this court cannot determine the depreciation to be deducted from the original cost in order to arrive at the written down value in the accounting year 1949-50. No further inquiry by the Tribunal can be ordered by this court while answering the reference. This is another reason for holding that this court cannot consider the Explanation when answering the reference.
It was contended on behalf of the Commissioner of Income-tax that the question before the court is what was the written down value of the assets in the accounting year 1949-50 and that it should be answered by it with reference to all laws governing it, including the Explanation. The argument was that though the High Court has to answer the question referred to it with reference to the law in force in 1957 (when the Tribunal disposed of the appeal), what that law was has to be discovered today with reference to the law existing today. What was the law in 1957 on the basis of which the Tribunal disposed of the appeal has certainly to be decided by this court today, but what has to be decided is the law existing in 1957 and not deemed to exist in 1957 by virtue of an amendment in the law made in 1962. In Chatturam Horilram Ltd. v. Commissioner of Income-tax, Jagannadha Das J., speaking for the Supreme Court, said that :
"The High Courts jurisdiction was only to answer the particular question that was referred to it by the Income-tax Appellate Tribunal and it is extremely doubtful whether they could have taken notice of a subsequent legislation and answered a different question..... Admittedly, the regulation was passed after the decision of the Income-tax Appellate Tribunal.... that the regulation... purported to be respective, it cannot have the effect of effacing the result brought about by the decision of the Income-tax Appellate Tribunal... unless there are clear and express words to that effect."
The scope of an inquiry before a High Court acting on reference under section 66 has been explained by the Supreme Court in Kusumben D Mahadevia v. Commissioner of Income-tax, in the following words :
"Section 66... only permits a reference of a question of law arising out of the order of the Tribunal. It does not confer jurisdiction on the High Court to decide a different question of law not arising out of such order. It is possible that the same question of law may involve different approaches for its solution, and the High Court may amplify the question to take in all the approaches. But the question must still be one which was before the Tribunal and was decided by it. It must not be an entirely different question which the Tribunal never considered."
The 1962 Amendment Order is amendatory and not clarificatory and it cannot be contended that the Explanation added by it simply makes clearer that "actually allowed" includes what would have been allowed if there had been no exemption. "Actually allowed" cannot include "not actually allowed but deemed to have been allowed or which would have been allowed if the income had not been exempted" and it is only by virtue of the Explanation that the meaning of "actually allowed" is enlarged so as to include that which would have been allowed if the income had not been exempted. Therefore, the argument that even without the Explanation this meaning should have been given to the words "actually allowed" falls to the ground.
If this court were to give effect to the Explanation while answering the question arising out of the statement of the case, certain contentions advanced on the assessees behalf must be dealt with. I have already referred to the absence of evidence as to the State of Rampur Income-tax law and the period during which the assets were used in the business and the impossibility of the Tribunals recording evidence on these matters now. It was contended on behalf of the assessee that after the repeal of the 1922 Indian Income-tax Act by the 1961 Act (No. 43 of 1961) it was not open to the Central Government to make any order for removal of difficulties in giving effect to its provisions. The 1961 Act has not repealed the 1922 Act completely or in all respects or in all circumstances; it has kept it alive in respect of certain returns such as the returns filed by the assessee in the instant case and the assessment proceedings pending on April, 1962, whether before an income-tax authority or a reference before a High Court. As far as the instant case is concerned, the 1922 Act is alive and in force as if the 1961 Act had not been passed. There could, therefore, be difficulty in giving effect to its provisions in the instant case and an order could be passed by the Central Government to remove it in the exercise of the powers conferred by the Taxation Laws Act, 1949 (67 of 1949). So long as there was a possibility of some provisions of the 1922 Act being applied, the Central Government has power to make an order to remove difficulties arising in applying them. One difficulty in applying the provisions of section 10(5) of the 1922 Act to merged States was that it contained no reference to depreciation actually allowed under the Merged States Taxation Act. This difficulty was removed by the 1949 Removal of Difficulties Order. Another difficulty in applying the provisions was that an assessee might have been exempted from income-tax in the merged State and that consequently, there was no occasion for his being actually allowed depreciation in previous years; this difficulty was sought to be removed by the 1962 Removal of Difficulties assessment orders and so long as they were kept in force notwithstanding the repeal of the 1922 Act and the 1949 Act was in force, the Central Government retained the power to remove difficulties arising in applying the provisions of section 10(2) and (5) to assessee of the merged States. The 1962 Order was not, and could not be, made in exercise of the powers conferred by section 298(2) of the 1961 Act.
Another contention advanced on behalf of the assessee was that section 298(2) of the Act of 1961 impliedly repeals section 6 of the 1949 Act, but I am unable to accept it. The two provisions occupy different fields and the doctrine of implied repeal is not applicable. Section 298 confers power upon the Central Government to make an order for removal of difficulties arising in giving effect to the provisions of the 1961 Act, whereas section 6 of the 1949 Act confers power to remove difficulties arising in giving effect to the provisions of the 1922 Act in the merged States. The 1922 Act and the 1961 Act apply in mutually exclusive circumstances; in no case can both apply. When the provision of the 1961 Act apply, difficulties arising in giving effect to them are to be removed by an order passed under section 298; in other circumstances in which the provisions of 1922 Act apply, the difficulties arising in giving effect to them are to be removed by an order passed under section 6 of the 1949 Act. The difficulties arising in giving effect to the provisions of the 1922 Act, even though they are kept in force, and made applicable after April 1, 1962, by section 297 of the 1961 Act, cannot be removed by any order made in exercise of the power conferred by section 298 for the simple reason that they be said to be difficulties arising in giving effect to the provisions section 297. The difficulties arising in giving effect to the saved provisions of the 1922 Act cannot be said to be difficulties arising in giving effect to section 297 saving them and cannot be removed by an order to be made under section 298. Under section 298(2) the Central Government could make an order providing for the application of the 1922 Act subject to certain adaptations and modifications, but this was subject to the overriding condition imposed by sub-section (1), that otherwise difficulties would arise in giving effect to the repeal of the 1922 Act. The only provision in the 1961 Act in respect of the 1922 Act is that of section 297 repealing it and the only difficulty in relation to the 1922 Act that could be removed by an order under section 298 was the difficulty, if any, arising in giving effect to the repeal save in certain circumstances. A difficulty arising in giving effect to certain of its provisions cannot be said to be a difficulty arising in giving effect to the provisions of section 297 of the 1961 Act repealing it save in certain circumstances. The difficulty arising out of the fact that in Rampur State an assessee could be exempted from income-tax, thereby removing the possibility of actually allowing depreciation, was not a difficulty arising in giving effect to the provisions of section 297 of the 1961 Act and could not be removed by the Central Government under section 298 of it. There would, therefore, have been no difficulty in the Tribunals acting upon the Explanation if it had been added before it disposed of the appeal.
Just as difficulties were apprehended to arise in applying the Act to the merged States so also difficulties were apprehended to arise in applying it to Part B States and the Central Government made the Taxation of Part B States (Removal of Difficulties) Order. Section 2 of it is similar to section 2 of the 1949 Removal of Difficulties Order but contains an Explanation, added in 1956, which is similar to sub-section (a) added by the 1962 Removal of Difficulties Amendment Order. The Explanation does not contain part (b) of our Explanation. It was discussed by the Supreme Court in Commissioner of Income-tax v. Dewan Bhadur Ramgopal Mills Ltd., but the judgment contains nothing helpful in the instant case.
In the result, I conclude that the question should be answered without regard to the Explanation added in the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, by the Amendment Order of 1962.
The answer will be that the written down value of the assets is the original cost.
Copies of this judgment should be sent under the seal of the court and the signature of the Registrar to the Income-tax Appellate Tribunal and the Commissioner of Income-tax, U. P., as required by section 66(6) of the Income-tax Act.
The assessee will get its costs of this reference, which I would assessee at Rs. 200, from the Commissioner of Income-tax, U. P. Counsels fee is assessed at Rs. 200.
S. C. MANCHANDA J. - I am in respectful agreement with the conclusion arrived at by my Lord the Chief Justice and the answer proposed by him to the reference, viz., that the question has to be answered without regard to paragraph 2 of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949. But I do so only because the aforesaid Explanation added in 1962 was not considered by the Tribunal as it could not have been, for it did not exist when the Tribunal decided the appeal and was enacted subsequent thereto and, therefore, the question of the applicability of the Explanation added in 1962, to the facts of the present case, cannot be said to arise out of the order of the Tribunal.
It the correct position in law is that a court of reference, under section 66 of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act), can answer only such questions as were present before the Tribunal and considered by it, and none others, then there is no escape from the conclusion that the High Court is debarred when answering a reference to look into any new law even if it be retrospective in nature bearing on the question and which may provide a complete answer on the day when the question is being answered, but which provision was not before the Tribunal when it decided the appeal. In other words, once the Tribunal has decided the appeal, no amendment of the law made subsequent thereto can touch that assessment, as the assessment final when the judgment of the Tribunal is delivered under section 33(6) of the Act. Section 33(6) provides that for all purposes, except in respect of such limited questions which may have been referred to the High Court under section 66 of the Act for its opinion, the assessment is deemed to have become final. The vexed words "arising out of the order of the Tribunal" in section 66 have formed the subject-matter of numerous decisions by the Supreme Court and other courts in India. The present case is again one which raises the same question but under different facts and circumstances which do not seem to have formed the subject-matter of any direct decision by the Supreme Court.
The interpretation which is sought to be placed by this court as to the jurisdiction of the High Court under section 66 undoubtedly raises serious implications and makes retrospective amendatory legislation after the Tribunal has given its decision in appeal of little or no avail to the department so far as that particular case is concerned, even though a reference may be pending at the time when the fresh provision or amendment is enacted.
The jurisdiction of the High Court under section 66 undoubtedly is a narrow one but is it so narrow as prevent it from considering a provision which did not exist when the Tribunal decided the case but which if considered would provide a complete answer to the question referred ? No decision has been brought to our notice which goes the extent of saying that a retrospective amendatory legislation which did not exist when the Tribunal decided the appeal can be taken into consideration when answering the reference.
There can be no doubt that an appellate court cannot shut its eyes but it must decide the appeal in accordance with the law as it exists on the day when it gives its decision. The Federal Court in Raja Bhadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-tax observed :
"The fact that an appeal was pending against the assessment is a material fact. When an appellate Tribunal (whether it is the Assistant Commissioner or the Appeal or the High Court or the Federal Court) decides the appeal it had to do so according to the law then in operation. If pending the litigation or pending the appeal some relevant legislation is enacted by the appropriate legislative authority, the deciding Tribunal must give effect to it... The court has, therefore, to consider whether when the Income-tax Appellate Tribunal decided the appeal and when the High Court expressed its view on the question of law submitted for its opinion, the same was according to the law then in operation."
In Chatturam v. Commissioner of Income-tax this view was reiterated by the Federal Court.
It has been laid down by the Supreme Court in State of U. P. v. Raja Syed Mohamad Saadat Ali Khan that the court of appeal must give effect to the law as it stands if the law has at some stage anterior to the hearing been amended retrospectively.
Similarly, when there existed a provision of law but it was inadvertently or otherwise not brought to the notice or was not considered by the Tribunal or the High Court which decided the appeal, reference or a writ petition, it would not debar the Supreme Court on appeal under section 66A(2) of the Act from looking into that provision for the first time and deciding the appeal according to the law as it obtained on that date, i.e. the day on which the judgment is given. Similarly, if a validating Act is enacted after the Tribunal or the High Court gives its opinion under section 66 of the Act the Supreme Court on appeal would be obliged to take into consideration the amending Act. This much is well settled by the majority decision of the Supreme Court in S. C. Prashar v. Vasantsen Dwarkadas, where it was laid down that even though the High Court on a reference under section 66 of the Act had not looked into or considered the provisions of the newly enacted section 34(4) by the Income-tax (Amendment) Act of 1959, it was open to the Supreme Court on appeal to High Court gave its decision but which was overlooked and which by itself furnished the answer to the question referred for the opinion of the High Court.
The question which confronts this court, however, is somewhat different and that is that when a provision is amendatory, though retrospective, but it was never considered by the Tribunal as it could not have been, then is it open to the High Court, not on appeal but on a reference, to take that amendatory provision into consideration in answering the question referred to it for its opinion ? The answer will depend on whether the question posed can be said to arise out of the order of the Tribunal. It is well-settled and the statute is clear on the point that only those questions can be referred and answered by the High Court which arise from the order of the Tribunal.
In Chatturam Horilran Ltd. v. Commissioner of Income-tax a passing doubt was expressed by the Supreme Court as to whether the High Court could take notice of a subsequent legislation which was not there when the Tribunal decided the appeal in answering the question referred. The Supreme Court again in Kusumben D. Mahadevia v. Commissioner of Income-tax pointed out that only the question arising out of the order of the Tribunal that can be answered and not a different question not arising out of the order of the Tribunal, and in any event it must be a question which was before the Tribunal and considered and decided by it. This and the other case in New Jehangir Vakil Mills v. Commissioner of Income-tax were considered by the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. and the scope and jurisdiction of the High Court under section 66 of the Act laid down. It was held that where the question itself was in issue, there is no further limitation imposed by section 66 of the Act and it would be an over-refinement to hold that each aspect of the question is itself a distinct question for the purpose of section 66 of the Act. Sometimes questions are framed in such general terms which might take in questions which were never in issue. In such cases the true scope of the reference will have to be ascertained. Where, however, the question is precise and specific, not only those contentions can be argued in support which had been raised before the Tribunal, but it was also competent to the courts in such a case to allow the necessary contentions to be advanced provided it is within the framework of the question referred.
It is difficult to say in the present case that the amendment of 1962 merely brought into play a different aspect of the same question. That amendment completely altered the position which prevailed at the time in 1957 when the Tribunal gave its decision. The Tribunal rightly pointed out in its order that there was no provision in the Removal of Difficulties Order, 1949, to meet a situation as the relevant time enacted the Income-tax Act of Rampur State, yet the assessee had been granted exemption from tax by an agreement with the then rule and for such a situation the order of 1949 had obviously made no provision. The amendment of 1962 was in order to remove that lacuna in the order of 1949 which existed at the time when the Tribunal gave its decision. When that provision of law did not exist nor was it considered by the Tribunal, it would be difficult to press into service the doctrine of continuity of proceedings in its application to a reference under section 66 of the Act. It is not enough to say that the High Court must answer the question referred to it but it must answer the question referred to it as arising out of the Tribunals order. No question, not arising out of the Tribunals order, can be referred to it nor can be answered by it. The question of law can only arise out of an order if it is in respect of a law then in force. It would be difficult to hold that a law which did not exist on the date of the Tribunals order but enacted subsequently can be said to give rise a question of law arising out of the Tribunals order, particularly when it cannot be said to be merely a different aspect of the same question. Such a question would be on a different provision of law and it might well be considered to be a distinct question. When the Tribunal referred the case the question that out of its order was whether the assessee had actually been allowed any depreciation and this had to be answered in the negative on the basis of the facts and the law then in force. During the pendency of the reference the law was altered by the addition of the aforesaid explanation and therefore though it may be possible to say that another question would arise, i.e. whether the Tribunal should have decided the question on the basis of the law actually existing or on the basis of the law deemed to exist then, but that question cannot be said to be a question arising out of the Tribunals order.
I would, therefore hold respectfully agreeing with my Lord the Chief Justice that the question referred cannot be answered by invoking the Explanation aforesaid added in 1962 and has to be answered on the law as it existed in 1957 when the Tribunal decided the appeal. If that be the correct position in law then there cannot be any doubt that the Tribunal erred in taking the book value of the assets in considering the depreciation allowable under section 10(2) (vi) and section 10(5) of the Act, and the assessee would have been entitled, because of the lacuna in the said order of 1949, to claim depreciation in the year 1950-51 assessment when the Income-tax Act of 1922 was made applicable for the first time, on the original cost of those assets, even though those assets were purchased as far back as 1943, or earlier and no matter how iniquitous or unjust such a claim may appear to be. Equity and taxation are strangers and the taxpayer can only be taxed or deprived of the taxing provision or statute.
It is true that the assets in the present case which are the subject-matter of a claim for depreciation by the assessee were purchased some time during 1942-43, relevant to the assessment year 1943-44, and the Rampur Income-tax Act came into force on April 1, 1944, but by and agreement with the then Ruler the assessee was exempted from payment of such tax. The Indian Income-tax Act, 1922, was made applicable to the merged Rampur State from April 1, 1949, and the assessee ordinarily would have become liable to pay income-tax for the first time as from May 1, 1949. For the month of April, 1949, the Central Government had specifically exempted the assessee from payment of tax. Therefore, up to that stage neither under the Rampur Income-tax Act, nor under the Income-tax Act or the Rules, was the assessee obliged to claim depreciation as an allowance for purposes of its assessment. The assessee, however, as a prudent business man and according to well recognised principles of accountancy depreciated his assets and created a reserve fund for the ultimate replacement of its assets whose wear and tear was inevitable.
The factual position, therefore, was that no depreciation under the Rampur Act or Rules had actually been allowed to the assessee because of the existence of the exemption agreement with the Ruler. The Removal of Difficulties Order, 1949, was also of no assistance to the revenue as it never provided for a contingency such as arising in the present case where the assessee was exempt from the tax by the Ruler of the State. There was, therefore, no alternative for the Tribunal but to have taken the original cost as provided in sections 10(5) and 10(2) (vi) of the Act, for the purposes of computing the written down value and the depreciation allowed when the Act of 1922 came to be applied for the first time. The words "actually allowed" mean exactly what those words say. That is also what was held by the Calcutta, Madras, Madhya Pradesh and Bombay High Courts in Commissioner of Income-tax v. Kamala Mills Ltd., Vankadam Lakshminarayana v. Commissioner of Income-tax, Nandlal Bhandari Mills Ltd. v. Commissioner of Income-tax, and Dharampur Leather Cloth Co. Ltd. v. Commissioner of Income-tax. It was precisely to counteract the effect of these decisions that the said Explanation was added on the 20th August, 1962, after the proviso to paragraph 2 of the Removal of Difficulties Order, 1949, under the powers conferred by section 298 of the Income-tax Act of 1961, which at the time was in force, the Income-tax Act of 1922 having been repealed by section 297 of that Act. The Explanation if it was validly added by using the words "means and shall always be deemed to have meant" clearly intended the provision to be retrospective in its operation. The interpretation which I would be inclined to place on the said Explanation is that it was a piece of amendatory retrsopective legislation and it must be deemed to have existed in the Removal of Difficulties Order, 1949, from its very inception and if an appeal had been pending at the time when the amendment was made, then there would have been no alternative but to give effect to that provision, but it cannot be taken into consideration in a reference matter, as the question cannot be said to arise out of the order of the Tribunal.
In this view of the matter it is unnecessary to go into the other contentions raised by the learned counsel for the assessee. But in case the matter is not allowed to rest here, I may express my views as, with respect, I am inclined to take a different view thereon from that taken by my Lord the Chief Justice.
It was contended for the assessee that the Explanation had not been validly added in 1962 to the Order of 1949, because section 298(2) of the Income-tax Act of 1961 could not have been pressed into service for adding the Explanation in order to remove a defect in the application of the repealed Act of 1922. I cannot accede to this contention. Section 297 of the Act of 1961 repealed the Income-tax Act of 1922. By the same section the Act of 1922 was saved for certain specified purposes. The present case is saved by section 297(2)(c) of the Act of 1961, which provides, inter alia, that any proceeding in reference pending at the time when the Act of 1961 came into force shall be continued and disposed of under the Act of 1922, and the Rules and Orders made thereunder and not under the Act of 1961. In other words the present reference which was pending when the Act of 1961 came into force had to be disposed of not under the Act of 1961, but under the Act of 1922 and the Rules and Orders made thereunder. The repealed Act, i.e., the Act of 1922, is declared to be dead and buried by virtue of section 297(1) of the Act of 1961, but it is again resuscitated and kept alive under section 297(2)(c) of the Act of 1961 for certain purposes. If any difficulty is experienced in giving effect to the provisions of section 297(2)(c) of the Act of 1961, which again brings to life the repealed Act of 1922, then the Central Government is given the powers under section 298 of the Act of 1961, to remove that difficulty so long as the order is not inconsistent with the provisions of the 1961 Act. The legislature, after giving the general power to remove difficulties under section 298(1) of the Act of 1961, was at pains to lay down sub-section (2) of section 298 that the power to remove difficulties will include the power to provide for modification and adaptation subject to which the repealed Act shall apply to all assessments pending on the 31st March, 1962, and prior thereto. Sub-section (2), therefore, clearly gave the Central Government power to introduce such an adaptation and modification into the repealed Act of 1922, subject to which the repealed Act alone would be applicable. The power to remove difficulties in the repealed Act of 1922 and a fortiori in respect of all orders passed thereunder were, therefore, clearly contemplated and retained under the new Act of 1961. The Act of 1922 itself having been repealed, no difficulty therein could possibly have been removed if this power under section 298 of the Act of 1961 had not been specifically given. The said Explanation was, therefore, validly added in 1962 to the Order of 1949 by virtue of the powers conferred under section 298(2) of the Act of 1961. But for section 297(2)(c), the repealed Act would have been had no application and, therefore, the difficulty which was to be removed was in the application of section 297(2)(c) of the Act of 1961 and, in order to remove that difficulty, the Removal of Difficulties Order, 1949, had to be modified or adapted by introducing the Explanation and thus removing the repealed Act to cases such as the present where the Ruler had exempted the assessee from the application to the State Income-tax Act. I would, therefore, be inclined to hold that the 1962 Order was validly enacted in the exercise of the powers conferred by section 298(2) of the Act of 1961, but that not having been considered by the Tribunal as it could not have, been this court is precluded from invoking those provisions in determining the question referred.
The Rampur State became merged some time before April 1, 1949. On 26th August, 1949, by section 3 of the taxation Laws (Extension to Merged States) Ordinance No. 21 of 1949, the Income-tax Act of 1922 with all rules and orders made thereunder with effect from April 1, 1949, were made applicable to Rampur State. Section 8 of this Ordinance gave the Central Government power to remove difficulties. On 3rd December, 1949, the Removal of Difficulties Order, 1949, was passed, known as the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949. Section 2 of this Order removed the difficulty in giving effect to the provisions of sections 10(2) (vi) and 10(5) of the Act of 1922 relating to depreciation that was to be allowed in a case where no depreciation was allowed under the Income-tax Act, 1922, but under the State income-tax law. This section of the Order provided for taking into consideration under the Indian Income-tax Act all depreciation which may have been allowed under the State Income-tax Act or Rules. The Ordinance of 1949 in due course gave way to Act 67 of 1949. By section 3 of the Act, the Indian Income-tax Act of 1922 was made applicable to all merged territories as from April 1, 1949. Section 6 contained a provision similar to section 8 of the Ordinance of 1949 for the removal of difficulties. The Ordinance was replaced but all action taken under the provisions were saved and all such action taken thereunder were deemed to have been taken under Act 67, of 1949. There was, already noticed, no provision in the Removal of Difficulties Order, 1949, to cover a situation that arose as in the present case. That order never provided for the contingency where though income-tax was extant in the State but its application was specifically exempted by an agreement with the Ruler. The amendment made in 1962 by adding the Explanation was to remove this lacuna in the Order of 1949, which provided that depreciation that would have been allowed had the income not been exempted has got to be determined and the written down value computed on that basis. If this Explanation added in 1962 could have been taken into consideration, although it had not been considered as it could not have been by the Tribunal, then my answer to the question would have been against the assessee and in terms of the Explanation, viz., that depreciation would have to be worked out on the legal fiction enacted therein which provides that even though no depreciation was in fact allowed under the State Income-tax Act but it must be deemed to have been allowed for the purpose of computing the depreciation and the written down value allowable under the Income-tax Act of 1922 for the year when it first came to be applied to the State of Rampur.
As I have already said the Explanation has to be ignored because its consideration cannot be said to arise out of the order of the Tribunal and my answer to the question referred, therefore, will be the same as proposed by my Lord the Chief Justice, that the written down value of the assets is the original cost to the assessee. I also respectfully agree with the order proposed in respect of the costs.