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Petitioner: ESCORTS LTD. and others VS Respondent: UNION OF INDIA and others
Court Name: Supreme Court of India Judge(s): V. Ramaswa mi, S. Ranganathan, B. P. Jeevan Reddy Title: ESCORTS LTD. and others vs UNION OF INDIA and others Case No.:Writ Petitions Nos. 5537 to 5543 of 1980 Writ Petition No, 90 of 1981 Writ
JUDGMENT
Reported As: 1993 PTD 846 Result: Petitions dismissed Judgment JUDGMENT ' RANGANATHAN, J.---The seeds of the present controversy were sown as early as in 1946. It is unfortunate that this matter should be coming up before this Court for its consideration nearly five decades later, though it must be pointed out that the issue in its present form is the outcome of an amendment made by the Finance (No,2) Act, 1980 (hereinafter referred to as "the 1980 Act"), to the Income Tax Act, 1961 (hereinafter referred to as "the 1961 Act"). It is also a curious coincidence that the 1980 Act effected two amendments in the 1961 Act with retrospective effect and the validity of both these provisions has been challenged before the Courts. The first was the controversy with regard to the retrospective amendment of section 80J which was settled by this Court by its decision in Lohia Machines Ltd. v. Union of India (1985) 152 ITR 308. It is the second amendment to the provisions contained in section 35(2). Of the 1961 Act that has given rise to the present controversy between the parties. The question is really one of interpretation of two important provisions relating to the computation of business income for purposes of income-tax. We may start with the provisions of the Indian Income-tax Act, 1922 (hereinafter referred to as "the 1922 Act"). The computation of business income for purposes of income tax was done in accordance with the provisions of section 10 of the said Act. In the process of making such computation, the Act provided for two important deductions (among others), in respect of the capital assets employed in the business. The first was the deduction under clause (vi) of section 10(2) of an allowance in respect of the depreciation of building, machinery, plant or furniture being the property of the assessee and used for the purposes of the business, at a prescribed percentage of the written
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down value of such assets. This allowance is calculated, in respect of the year of acquisition of the property, at a percentage of its actual cost to the assessee and, in subsequent years, at a graduated scale on the basis of the actual cost less the depreciation allowances granted in the preceding years. In strict principle, this is an allowance of capital nature but it is now well-settled that the allowance of depreciation has to be taken into account in order to ascertain the true profits of a business and, therefore, an assessee is permitted to deduct, in the computation of the business income year after year, the prescribed percentage of the value of the assets used for the purposes of business. The second allowance was not there in the 1922 Act originally and was introduced by the Income-tax (Amendment) Act, 1946. The introduction was of certain allowances in respect of expenditure on "scientific research related to the business", an expression which was defined in a fairly comprehensive manner by the statute. Three types of allowances were permitted in respect of this category of expenditure of which we are here concerned with only one. This provision was contained in clause (xiv) of section 10(2) which permitted deduction: "In respect of any expenditure of a capital nature on scientific research related to the business, an allowance for each of the five consecutive previous years beginning with the year in which the expenditure was incurred, or where the expenditure' was incurred prior to the commencement of the business, for each of the five consecutive previous years beginning with the year in which the business was commenced, equal to one-fifth of such expenditure: ' Provided that no allowance shall be made for any expenditure incurred more than three years before the commencement of the business: ' Provided further that--... (d) where a deduction is allowed for any previous year under this clause in respect of expenditure represented wholly or partly by any asset, no deduction shall be allowed under clause (vi) or clause (vii) for the same previous year in respect of that asset; (e) where an asset is used in the business after it ceases to be used for scientific research related to that business, and a claim for an allowance under clause (vi) or clause (vii) is made in respect of that asset, the actual cost to the assessee of the asset shall be treated as reduced by the amount of any deductions allowed under this clause;" ' A cursory and conjoint reading of section 10(2)(vi) and section 10(2)(xiv) suggests that, where an assessee incurs expenditure of a capital nature on scientific research related to the business and the expenditure results in the acquisition of an asset, the assessee can claim, under clause (vi), a deduction of the specified percentage of the Written down value of the asset and, under clause (xiv), he can ask for a deduction, in five consecutive years, of the expenditure he has incurred on the acquisition of the asset. For this purpose, we are assuming that an asset used for scientific research related to the business is also ipso facto an asset used for the purpose of business. There has been some debate before us as to whether this is always so but we need not enter into that controversy for the purposes of the present case. It will at once be seen that, if these two provisions are applied simultaneously, it would result in granting an assesse a double allowance in respect of the same expenditure---one, of the entire amount over a period of five years and the other, a percentage of the expenditure over a number of consecutive years at a graded scale as already mentioned. The question at once leaps to the mind as to whether it could have been the intention of the Legislature to permit both these deductions simultaneously to an assessee. The provisions of clauses (d) and (e) of the proviso to section 10(2)(xiv) contain a clue to answer this question. More about it later. ' We next turn to the provisions of the 1961 Act. The topic of depreciation is dealt with by section 32. Section 32(1)(ii) provides for depreciation. As under the 1922 Act, it is allowed at a percentage of the written down value of certain capital assets employed in the business. The topic of scientific research expenditure is dealt with by section 35. Section 35(1) provides for the deduction of four
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types of expenditure on scientific research and what we are concerned with is the deduction provided under section 35(1)(iv), which is to the following effect: "(iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of subsection (2)." ' Subsection (2) provides that for the purposes of clause (iv) of subsection (1), one-fifth of the capital expenditure incurred in any previous year shall be deducted for that previous year; and the balance of the expenditure shall be deducted in equal instalments in each of the four immediately succeeding previous years. There is an Explanation which is not relevant for our present purposes. Reading section 35(2) further, it provides in clauses (iv) and (v) as follows: "(iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clauses (i), (ii) and (iii) of subsection (1) of section 32 for the same previous year in respect of that asset; (v) where the asset mentioned in clause (ii) is used in the business after it ceases to be used for scientific research related to that business, depreciation shall be admissible under clauses (i), (ii) and (iii) of subsection (1) of section 32." ' Reference must also be made to Explanation 1 to section 43(1) in this context. It read as follows at the relevant time: Explanation I.---Where an asset is used in the business after it ceases to be used for scientific research related to that business, and a deduction has to be made under clause (i), clause (ii) or clause (iii) of subsection (1) or subsection (1A) of section 32 in respect of that asset, the actual cost of the asset to the assesse shall be the actual cost to the assessee as reduced by the amount of any deduction allowed under clause (iv) of subsection (1) of section 35 or under any corresponding provision of the Indian Income Tax Act, 1922 (11 of 1922)." ' From the above, it will be seen that the provisions of section 32(1)(ii) and section 35(2)(i)(iv) and (v) read with Explanation 1 to section 43(1) virtually repeat the provisions contained in section 10(2) (vi) and section 10(2)(xiv) of the 1922 Act, so that the question earlier posed still loomed in the background of the 1961 Act. ' In 1968, there was an amendment in the provisions of section 35(2). The subsection was amended to read as follows:--- "(2) For the purposes of clause (iv) of subsection (1),--- (i) in a case where such capital expenditure is incurred before the 1st day of April, 467 one-fifth of the capital expenditure incurred in any previous year shall be dedufted for that previous year; and the balance of the expenditure shall be deducted in equal instalments for each of the four immediately succeeding previous years; (ia) in a case where such capital expenditure is incurred after the 31st day of March, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year." ' The effect of this amendment was only to provide that the entire amount of capital expenditure incurred in relation to scientific research was allowed as a deduction in one year instead of being spread over a period of five years as was the position earlier. This amendment does not touch the controversy in issue before us and it has no solution to offer to resolve our present difficulty. The provisions of section 10(2)(vi) and (xiv) of the old Act had been administered between 1946 and 1962 and the provisions of sections 32 and 35 of the 1961 Act have been administered since 1962. The question whether an assessee can simultaneously claim an allowance or deduction in respect of the same expenditure once under section 32 and again in section 35 must have cropped up in some cases and it does appear that such a double claim was put forward in some cases. The contention on behalf of the assesees was that the allowances in respect of depreciation on the one hand and in respect of capital expenditure on scientific research on the other are two
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totally different and independent heads of allowances. One is a notional allowance to provide for the wear and tear of a capital asset employed in the business as the years roll by; the other is an allowance for actual expenditure of a capital nature granted on the eve of our country's independence, in order to give a fillip to new industrial innovations and the development of indigenous know how and techniques by proper, planning on research and development by various business houses. It is, therefore, suggested that there is nothing absurd in construing the statutes as providing cumulatively for both types of deductions in respect of the same capital asset. The only limitations on this right are the two placed by the statute itself. The first limitation, contained in clause (d) of the proviso to section 10(2)(xiv) and section 35(2)(iv) is that both the deductions cannot be claimed "for the same previous year" in respect of the same capital asset. The second limitation is found in clause (e) of the proviso to section 10(2)(xiv) and section 35(2)(v) which says that, if a capital asset used for scientific research ceases to be so used but is thereafter brought into business for use therein, the actual cost for purposes of granting depreciation in respect of the asset thereafter should be taken as the amount of its original cost reduced by the amount of deductions allowed under section 10(2)(xiv) or section 35(2). In other words, the contention of the assessee was and is that both the types of allowances are permissible under the statute except to the extent limited by clauses (d) and (e) of the proviso to section 10(2)(xiv) of the 1922 Act and reproduced in clauses (iv) and (v) of section 35(2) of the 1961 Act. ' Before us, it is claimed on behalf of the assessee that this interpretation of the statutory provisions is very clear, patent and unambiguous. It is alleged that, despite this, some Income Tax Officers started disallowing the claim of depreciation in respect of such capital assets even in previous years during which no deduction was claimed or allowed under section 10(2)(xiv) or section 35(2), contrary to the clear language of clause (d) of section 10(2)(xiv) and section 35(2)(iv). These orders were reversed on appeal either by the Appellate Assistant Commissioner or by the Tribunal. It was suggested that these decisions were almost unanimously in favour of the assessee but the Department persisted in pursuing the matter up to the stage of the High Court. Only one reference on this topic came up before the High Courts and is reflected in the decision of the Karnataka High Court reported as CIT v. Indian Telephone Industries Ltd. (1980) 126 ITR 548. This was a reference of the year 1977 made at the instance of the Commissioner of Income-tax and the Commissioner of Income-tax lost this reference. The High Court reaffirmed the position contended for by the assessee as the one and only possible interpretation of the statutory provisions. It is, therefore, contended that there was, and could have been, no doubt that an assessee was entitled to claim depreciation allowance in respect of such assets in respect of previous years other than those in which an allowance had been allowed under the other heads. We shall revert later to this aspect of the matter. ' At this stage, the Finance (No,2) Act, 1980, intervened. It amended section 35(2)(iv) to read as follows: "(iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clauses (i), (ii), (iia), (iii) and (vi) of subsection (1) or under subsection (IA) of section 32 for the same or any other previous year in respect of that asset." (emphasis added). ' The Finance (No,2) Act made this amendment retrospective with effect from April 1, 1962, that is, the date of the commencement of the 1961 Act. This amendment is, undoubtedly, far-reaching in its effect. It will result in completion of the pending assessments of several years on the footing of the new provision. It will also involve reopening or rectification of completed assessments of earlier years, to the extent permissible under the provisions of sections 148 and 154, in cases where assessees had been granted "double allowance" accepting their contention at the time of the original assessm ents. The effect will be not for one assessment year but fora number of
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assessm ent years in succession. Painting a very grim picture of the consequences of giving full retrospective effect to the amendment, the assessees say that it will impose unexpected and impossible burden on them over the years, jeopardise their solvency and lay them open to action by creditors and financial institutions. Such an onerous burden, it is said, is unreasonable and oppressive and the provision imposing such burden violates the fundamental rights of assessees under Articles 14 and 19(1)(g) of the Constitution of India. It is on this plea that even though assessm ents and appeals are pending in several of these cases, the petitioners chose to approach this Court by way of writ petitions under Article 32 of the Constitution. These are mostly writ petitions of the year and are now coming up for hearing after a period of ten years. ' Learned counsel for the assessees do not contest the competence of the Legislature to enact the impugned provision, nor do they dispute the right of the Legislature to give retrospective effect to statutory provisions. The contention only is that retrospective provisions may be permissible even in taxing statutes in certain special circumstances such as in the case of provisions clarifying the impact of a statute, provisions curing defective legislations in the light of judicial decisions and the like. They, however, say that if the Legislature chooses to impose a totally new burden, which was not at all in contemplation earlier and proceeds to give full retrospective effect thereto, such an attempt should be struck down as unreasonable and discriminatory. The principle questions, therefore, for our consideration are: ' Were the earlier statutory provisions capable of only one interpretation, namely, that placed by the assessees or was there any ambiguity in relation thereto? ' If there was some doubt or ambiguity about the earlier legislation, and the 1980 Act clarified the position by a retrospective amendment, would it offend the provisions of the Constitution? ' If, on the other hand, the earlier provision was very clear and capable of only one interpretation, as pleaded by the assessee, was the Legislature within its rights in amending the provision retrospectively with effect from April 1, 1962, and thus imposing an unreasonable tax burden on assessees?" ' Taking up the first .Of the three questions, it has to be considered from two angles, one, factual and the other, legal. An attempt was made on behalf of the petitioners to project an image as if the interpretation sought to be placed by the Department on the pre-1980 provisions to disallow depreciation on such assets was so far-fetched that it never received the approval of the higher appellate authorities. It was suggested that the appeals by assessees against the disallowance invariably succeeded and it was the Department that had to move the High Court on reference and the first of which references came up before the Karnataka High Court in CIT v. Indian Telephone Industries Ltd. (1980) 126 ITR 448, and was answered against the Department. On the basis of such allegations, the petitioners attempted to make out that the Department's interpretation was patently untenable and that the 1980 amendment. Is not in the nature of a statutory clarification of an ambiguity but a totally new and fresh imposition sought to be unjustifiably given retrospective effect. ' But, as Sri B.B. Ahuja has pointed out, on the basis of the averments of the petitioner in one of the cases, viz., Writ Petition No,1153 of 1981, the impression sought to be created by the petitioners does not accord with the correct facts. The position in the case is available only as it stood at the time when the writ petition and the counter-affidavit were filed and subsequent developments are not known. Nevertheless, the picture that emerges is this. In that case, the Income Tax Officer is said to have allowed depreciation on assets used for scientific research for the assessment year 1969-70, though this is denied by the Department. The claim was perhaps disallowed by the Income Tax Officer for the assessm ent year 1970-71, but it was allowed by the Allahabad Bench of the Income Tax Appellate Tribunal by its order, dated August 30, 1976. For the assessment year 1971-72, the Income Tax Officer disallowed the depreciation. The Appellate Assistant Commissioner allowed it.
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The Department appealed to the Delhi Bench of the Income Tax Appellate Tribunal which accepted the Department's plea by its order, dated August, 13, 1979, placing reliance on the decision of a Special Bench of the Income Tax Appellate Tribunal. It has been stated that the assessee filed an application for reference to the High Court which was pending when the writ petition was filed. For the assessm ent years 1972-73 to 1974-75, the assessments are pending as a stay order had been obtained for reasons which are not known. For the assessment years 1975-76 and 1976-77; the assessee claimed depreciation on a number of items of scientific research assets. The Income Tax Officer "allowed" the claims subject to the rider that "there is no provision to give deduction of more than 100 per cent. Of the allowance by way of depreciation". The assessee appealed to the Commissioner of Income-tax (Appeals) who disallowed the claim, For 1977-78, the Income Tax Officer disallowed the claim and the Commissioner of Income-tax dismissed the assessee's appeals. For the assessm ent years 1978-79 to 1980-81, the assessments are stated to be pending. The above facts are sufficient to show that, at least after April 1, 1968--there is no information before us as to the position between April 1, 1946, and March 31, 1968---the Department has been putting forward its objections on the issue and that the same was the subject-matter of controversy at various appellate stages, some decided in favour of and some against, the assessee. A Special Bench of the Income-tax Appellate Tribunal had indeed decided the issue against the assessee. In this background, it is not correct to say that the position was crystal clear and that, save for a few Income-tax Officers who took a biased view, the authoriteis were all agreed that the Department's stand was untenable. Some of the reported decisions also show that there was a live controversy and that references have been made to High Courts both at the instance of the assessees (see Alkali and Chemical Corporation of India Ltd. v. CIT (1986) 161 ITR 820 (Cal.) and CIT v. Indian Explosives Ltd. (1991) 192 ITR 144 (Cal.), as well as at the instance of the Revenue (see CIT v. International Instruments (P.) Ltd. (1983) 144 ITR 936 (Kar.); CIT v. Mahindra Sintered Products Ltd. (1986) 161 ITR 692 (Born.) and Warner Hindustan Ltd. v. CIT (1988) 171 ITR 224 (AP). The petitioner's contention that, under the pre-amended provisions, depreciation on such assets was recognised all round as clearly allowable, is, therefore, rejected:We have dealt with this aspect only to meet an aspect that was urged. What is really important is the true and correct interpretation of those provisions, not what someone thought of it then and to this aspect we shall now turn. ' The second aspect of the first of the three questions posed earlier for our consideration is the legal or interpretational aspect of the provisions as they stood prior to the 1980 amendment. Under the provisions of the statute as they stood earlier, could the assessees have claimed continued grant of depreciation after the expiry of five previous years before the 1968 amendment and after the expiry of the first year after the 1968 amendment, even though the entire cost of the capital asset in question had been allowed to be written off completely against the business profits of those five previous years or one previous year as the case may be? We think the answer to this question must emphatically be in the negative. In our view, it is impossible to conceive of the Legislature having envisaged a double deduction in respect of the same expenditure, even though it is true that the two heads of deduction do not completely overlap and there is some difference in the rationale of the two deductions under consideration. On behalf of the assessees, reliance is placed on the following circumstances to support the contention that the statute did not intend one deduction to preclude the other: (i) It is pointed out that section 10(2)(xiv) of the 1922 Act was inserted in 1946 consequent on the insertion of a corresponding provision in the United Kingdom. That provision viz., section 20(4) of the United Kingdom Finance Act, 1944, read thus: "(4) Where a deduction is allowed for any year under this or the last preceding section in respect of expenditure represented wholly or partly by any assets, no deduction shall be allowed under any
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provisions of the Income-tax Act other than this part of this Act in respect of wear and tear, obsolescnce, depreciation or exceptional depreciation of these assets for any year of assessm ent during any part of which they are used by the person carrying on the trade for scientific research related to the trade." (emphasis supplied). ' The Indian provision, it is said, has made a deliberate departure from the said provision and limited the bar of depreciation only to those previous years during which a deduction is allowed under section 10(2)(xiv); (ii) When the Income-tax Bill, 1961, was under the consideration of the Law Commission, the provisions of section 10(2)(vi) and (xiv) were carefully reviewed. But changes were made and the provisions of the new Act in this regard were drafted in pari materia with those of the old Act; (iii) The…
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