PETITIONER: <NAME> & OTHERS Vs. RESPONDENT: <NAME> & ANOTHER DATE OF JUDGMENT: 20/05/1958 BENCH: <NAME>, K. BENCH: <NAME>, K. DAS, <NAME> (CJ) BHAGWATI, <NAME>, S.K. CITATION: 1958 AIR 838 1959 SCR 878 ACT: Pre-emption, nature of the right-Pre-emptor filing suit and obtaining decree-Second pre-emptor of equal degreefiling suit for Pre-emption First pre-emptor deositing purchase moneand obtainIng Possession-If suit of second Pre- emptor cansucced-Lis penden-Scope--Punjab Pre-emptor Act (Pun. 1 Of 1913),ss. 17, 28. HEADNOTE: Upon the sale of certain village land the appellants filed a suit for pre-emption, and a compromise decree was passed allowing pre-emption provided the appellants deposited the purchase amountbvacertaindate. The appellants Posited the amount and got Possession of the land. Before the appellants deposited 879 the amount, the respondents who were pre-emptors of an equal degree, filed a suit to enforce their right of pre-emption. The appellants contended that the land could be divided between two equal pre-emptors only when both the suits were pending before the court at the time of the passing of the decree, and that the appellants having obtained the decree and paid the amount got substituted in place of the vendees and the respondents could succeed only by establishing a superior right of pre-emption. The respondents countered that they had a statutory right under s. 17 Of the Punjab Pre-emption Act to share the land with the appellants and that the appellants, having been substituted in place of the vendees Pendente lite, were hit by the doctrine of lis pendens and could not claim a higher right than the vendees: Held, that the respondents' suit could not succeed as they (lid not have a superior right of pre-emption over the appellants who had become substituted in place of the vendees upon payment of the purchase money under their decree. A pre-emptor has two rights: (i) inherent or primary right to the offer of a thing about to be sold and (2) a secondary or remedial right to follow the thing sold. The secondary right is simply a right of substitution in place of the original vendee. <NAME> v. <NAME>, 136 P. R. 1894 at P. 511 and <NAME> v. <NAME>, (1885) I.L.R. 7 All. 775, followed. In a suit for pre-emption the plaintiff must show that his right is superior to that of the vendee and that it subsists at the time he exercises his right. This right is lost if before he exercises it another person with an equal or superior right has been substituted in place of the original vendee. The Punjab Preemption Act defines the right of pre- emption and provides a procedure for enforcing it. It does not enlarge the content of this right nor does it introduce any change in the incidents of the right. Section 28 Of the Act does not preclude the <ORG> from giving a decree for pre-emption in a case where the suits are not joined together and one of the suits has been decreed separately. The doctrine of lis pendens applies only to a transfer Pendente lite, but it cannot affect a pre-existing right. If the sale is a transfer in recognition of a preexisting and subsisting right, it would not be affected by the doctrine, as the transfer does not create a new right Pendente lite but if the preexisting right became unenforceable by reason of limitation or otherwise, the transfer, though ostensibly made in recognition of such a right, in fact creates only a new right pendente lite. The appellants' right of pre-emption was subsisting and was not barred by limitation at the time of the transfer in their favour as they had filed a suit and had obtained a decree and the coercive 112 880 process was still in operation. Consequently the appellants were not hit by the doctrine of lis pentlens and they acquired an indefeasible right to the land when they took possession of it after depositing the purchase money in court. <CITATION> jal, (1930) I.L.R. 11 Lah. 258, Mt. Sant Kaor v. <NAME>, I.L.R.  Lah. 467, <NAME> v. <NAME>, A.I.R. 1946 Lah. 322 and <NAME> v. <NAME>, A.I.R. 1949 East Punj. 193, approved. <CITATION> , A.I.R. 1927 All. 664, disapproved. The right of pre-emption is effectively exercised or enforced only when the pre-emptor has been substituted for the vendee. A conditional decree whereunder the pre-emptor gets possession only if he pays a specified amount within a prescribed time and which also provides for the dismissal of the suit in case the condition is not fulfilled, cannot bring about the substitution of the decree holder for the vendee before the condition is fulfilled. Such substitution takes effect only when the decree holder fulfils the condition and takes possession of the land. <NAME> <CITATION> , (1916) L. R. 44 I. A. 80, followed. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 255 of 1954. Appeal by Special Leave from the judgment and decree dated April 29, 1953, of the former <ORG> in R. S. A. Nos. 57 and 130 of 1952, arising out of the judgment and decree dated March 8, 1952, of <ORG>, Faridkot, in Civil Appeal No. 10 of 1952, against the judgment and decree dated December 4, 1951, of <ORG> Faridkot, in File No. 13 of 1951. <NAME> and <NAME>, for the appellant. <NAME> and <NAME>, for respondents Nos. 1 to 3.

1958. May 20. The Judgment of the Court was delivered by <NAME> - appeal by Special Leave against the judgment and decree of <ORG> and <ORG> raises an interesting question pertaining to the Law of Preemption.

The material facts are not in dispute and may be briefly stated: The dispute relates to a land measuring 179 kanals and 2 marlas, situate in village Wanderjatana. On August 26, 1949, defendants 3 to 7 sold the said land to defendants I and 2 for a consideration of Rs. 37,611. On August 26, 1950, defendants 8 to 11 instituted a suit, Suit No. 231 of 1950 (Exhibit P. 26/1) in <ORG>, 11 Class, Faridkot, to pre-empt the said sale on the ground, among others, that they bad a right of preemption. On January 6, 1951, the vendees, i. e., defendants I and 2, and the plaintiffs therein, i. e., defendants 8 to 11 (appellants in the present appeal), entered into a compromise. Under the terms of the compromise, the vendees admitted that they had received Rs. 1,700 from defendants 8 to II and that defendants 8 to 1 1 agreed to pay the balance of the consideration, amounting to Rs. 35,911 on the 27th April, 1951,. It was further agreed that on the payment of the said amount, they should get possession through <ORG>. As the amount agreed to be paid was in excess of the pecuniary jurisdiction of <ORG>, they filed the compromise deed in the <ORG> of the District Judge and on the basis of the said compromise, the District Judge made a decree dated January 23, 1951. It was provided in the decree that in case defendants 8 to I I failed to pay the balance to the vendees on April 27, 1951, the suit should stand dismissed and that if the said balance was paid on that date, the vendees should deliver possession of the land in dispute to them. Defendants 8 to 11 deposited the balance of Rs. 35,911 on April 23, 1.951, and got possession of the land on May 17, 1951.

Before the said defendants (8 to 11) deposited the amount in <ORG> under the terms of the compromise decree, the resondents herein, claiming to be owners of land in the same patti, filed Suit No. 13 of 1951 in the <ORG> of the Subordinate Judge, 11 Class, Faridkot, to enforce their right of pre-emption. To that suit the original vendors were impleaded as defendants 3 to 7, the vendees as defendants I and 2 and the plaintiffs in Suit No. 231 of 1950 as defendants 8 to 11.

Defendants 8 to 11 contested the suit, inter alia, on the grounds that the plaintiffs had no right of preemption superior to that of theirs, that the suit was barred by limitation and that the whole of the sale consideration had been fixed in good faith and paid.

The learned Subordinate Judge found all the issues in favour of defendants 8 to 11 and dismissed the suit. On the main issue he found that the said defendants, by obtaining a decree for pre-emption before the rival claimants had filed their suit, had become vendees through <ORG> and so the plaintiffs could not succeed unless they had a superior right.

The plaintiffs preferred an appeal to. the <ORG> Judge, <NAME>, against the said decree. The District Judge held that the plaintiffs and defendants 8 to 11 had equal rights of pre-emption and were entitled to share the sale in the proportion of 3/7 and 4/7 respectively on payment of the proportionate amount of the consideration. On the main question, he took the view that defendants 8 to 11 did not exercise their right of pre-emption when the present suit was instituted for the reason that by the date of the filing of the suit they had not deposited the purchase money in <ORG>. Both the parties filed Second Appeals against the decision of the District Judge in the High <ORG> of Patiala questioning that part of the decree which went against them. The High <ORG> upheld that part of the decree of the learned District Judge holding that the plaintiffs were entitled to a share in the suit property but remanded the suit to the District Judge to give his findings on the following two questions: (1) What was the amount paid by defendants 8 to 11 to the original vendees and whether they paid it in good faith; (2) Whether the case would come under s. 17C, cl. (e) of the Punjab Pre-emption Act (hereinafter to be referred to as the -Act). As the High <ORG> refused to certify that the case was a fit one for appeal to the Supreme <ORG>, defendants 8 to 11 preferred the above appeal by obtaining special leave of this <ORG>. The learned Counsel for the appellants raises the following two contentions before us: (1) Section 28 of the Pre-emption Act indicates that a property can be divided between equal pre-emptors in terms of s. 17 of the Pre- emption Act only when both the suits are pending before the <ORG> at the time of the passing of the decree ; (2) the appellants exercised their right of pre-emption by obtaining a decree or at any rate when they deposited the money payable under the decree and thereby got themselves substituted in place of the original vendees and thereafter, the plaintiff's can succeed only by proving their superior right to them. The learned Counsel for the respondents countered the aforesaid argument by stating that the plaintiffs, being pre-emptors of equal degree, have got a statutory right under s. 17 of the Pre-emption Act to share the land with the appellants, and the appellants, having been substituted in place of the original vendees pendente lite, are hit by the doctrine of lis _pendens and therefore, they cannot claim higher rights than those possessed by the original vendees at the time of the filing of the suit. Before attempting to give a satisfactory answered to the question raised, it would be convenient at the outset to notice and define the material incidents of the right of pre-emption. A concise but lucid statement of the law is given by <NAME> in <NAME> v. <NAME> (1) thus: A preferential right to acquire land, belonging to another person upon the occasion of a transfer by the latter, does not appear to me to be either a right to or a right in that land. It is,jus ad rem aliens acquirendum and not a jus ?'In re aliena......... A right to the offer of a thing about to be sold is not identical with a right to the thing itself, and that is the primary right of the pre-emptor. The secondary right is to follow the thing sold, when sold without the proper offer to the pre-emptor, and to acquire it, if he thinks fit, in spite of the sale, made in disregard of his preferential right."

The aforesaid passage indicates that a pre-emptor has two rights: (1) inherent or primary right, i.e., a right (1)136 P. R. 1894 at p. 5ii.

to the offer of a thing about to be sold and (2) secondary or remedial right to follow the thing sold. <NAME> in his classic judgment in <NAME> v. <NAME> (1) explained the scope of the secondary right in the following terms:

" It (right of pre-emption) is simply a right of sub- stitution, entitling the pre-emptor, by means of a legal incident to which sale itself was subject, to stand in the shoes of the vendee in respect of all the rights and obligations arising from the sale, under which lie, derived his title. It is, in effect, as if in a sale deed the vendee's name were rubbed out and pre-emptor's name inserted in its place".

The doctrine adumbrated by the learned Judge, namely, the secondary right of pre-emption is simply a right of substitution in place of the original vendee, has been accepted and followed by subsequent decisions. The general law of pre-emption does not recognize any right to claim a share in the property sold when there are rival claimants. It is well-established that the right of pre- emption is a right to acquire the whole of the property sold in preference to other persons ( <CITATION> (2)).

The plaintiff is bound to show not only that his right is as good as that of the vendee but that it is superior to that of the vendee. Decided cases have recognized that this superior right must subsist at the time the pre-emptor exercises his right and that that right is lost if by that time another person with equal or superior right has been substituted in place of the original vendee. Courts have not looked upon this right with great favour, presumably, for the reason that it operates as a clog on the right of the owner to alienate his property. The vendor and the vendeeire, therefore, permitted to avoid accrual of the right of pre-emption by all lawful means. The vendee may defeat the right by selling the property to a rival pre- emptor with preferential or equal right. To summarize: (1) The right of pre-emption is not a right to the thing sold but a right to the offer of a thing about to be sold.

(i) (1885) I.L. R. 7 All. 775, 809.

(2) (1930) I.L.R. 11 Lah. 258, 273.

This right is called the primary or inherent right. (2) The pre-emptor has a secondary right or a remedial right to follow the thing sold. (3) It is a right of substitution but not of re-purchase, i. e., the pre-emptor takes the entire bargain and steps into the shoes of the original vendee. (4) It is a right to acquire the whole of the property sold and not a share of the property sold. (5) Preference being the essence of the right, the plaintiff must have a superior right to that of the vendee or the person substituted in his place. (6) The right being a very weak right, it can be defeated by all legitimate methods, such as the vendee allowing the claimant of a superior or equal right being substituted in his place.

The next question is whether this right is modified or otherwise enlarged by the' provisions of the Act. Relevant provisions of the Act, material to the present purpose, read thus:

Section 4: " The right of pre-emption shall mean the right of a person to acquire agricultural land or village immovable property or urban immovable property in preference to other persons, and it arises in respect of such land only in the case of sales and in respect of such property only in the case of sales or of foreclosures of the right to redeem such property".

Section 13: " Whenever according to the provisions of this Act, a right of pre-emption vests in any class or group of persons the right may be exercised by all the members of such class or group joint, and, if not exercised by them all jointly, by any two or more of them jointly, and, if not exercised by any two or more of them jointly, by them severally".

Section 17: " Where several pre-emptors are found by the Court to be equally entitled to the right of preemption, the said right shall be exercised,-

(a)if they claim as co-shares, in proportion among themselves to the shares they already hold in the land or property ;

(b)if they claim as heirs, whether co-sharers or not, in proportion among themselves to the shares in which but for such sale, they would inherit the land or property in the event of the vendor's decease without other heirs;

(c)if they claim as owners of the estate or recognised subdivision thereof, in proportion among themselves to the shares which they would take if the land or property were common land in the estate or the subdivision, as the case may be;

(d)if they claim as occupancy tenants, in proportion among themselves to the areas respectively held by them in occupancy right;

(e)in any other case, by such pre-emptors in equal shares."

Section 19: " When any person proposes to sell any agricultural land or village immovable property or urban immovable property or to foreclose the right to redeem any village immovable property or urban immovable property, in respect of which any persons have a right of preemption, lie may give notice to all such persons of the price at which he is willing to sell such land or property or of the amount due in respect of the mortgage, as the case may be. Such notice shall be given through any Court within the local limits of whose jurisdiction such land or property or any part thereof is situate, and shall be deemed sufficiently given if it be stuck up on the chaupal or other public place of the village, town or place in which the land or property is situate."

Section 20: " The right of pre-emption of any person shall be extinguished unless such person shall, within the period of three months from the date on which the notice tinder section 19 is duly given or within such further period not exceeding one year from such date as the court may allow, present to the Court a notice for service on the vendor or mortgagee of his intention to enforce his right of

-pre-emption. Such notice shall state whether the preemptor accepts the price or amount due on the footing of the mortgage as correct or not, and if not, what sum he is willing to pay."

" When the Court is satisfied that tile said notice has been duly served on the vendor or mortgagee the proceedings shall be filed."

Section 28: " When more suits than one arising out of the same sale or foreclosure are pending the plaintiff in each suit shall be joined as defendant in each of the other suits, and in deciding the suits the court shall in each -decree state the order in which each claimant is entitled to exercise his right".

The Act defines the right and provides a procedure for enforcing that right. It does not enlarge the content of that right or introduce any change in the incidents of that right. Section 4 embodies the preexisting law by defining the right as a right of a person to acquire land in preference to other persons in respect of -,ales of agricultural lands. Section 13 cannot be read, as we are asked to do, as a statutory recognition of a right of preemptors of equal degree to exercise their rights piece- meal confined to their shares in the land. Section 13 confers on a group of persons, in whom the right of preemption vests, to exercise that right either jointly or severally, that is to say, either the group of persons or one of them may enforce the right in respect of the entire sale. Section 17 regulates the distribution of preempted land when the <ORG> finds that several pre-emptors are equally entitled to the right of pre-emption. But this Section applies only where (1) the right is yet to be exercised and (2) the pre-emptors are found by the <ORG> to be equally entitled to exercise the right. The section does not confer the right on or against a person, who has already exercised the right and ceased to be a preemptor by his being legitimately substituted in place of the original vendee. (See <NAME> v. <NAME> (1) at p. 274 and <CITATION> (2)). Sections 19 and 20 prescribe the procedure for the exercise of the primary right, while s. 28 confers a power on the <ORG> to join together two or more suits arising out of the same sale, so that suitable directions may be given in the decree in regard to the order in which each claimant is entitled to exercise the right. This section is enacted presumably to avoid conflict of decisions and finally determine the rights of the various claimants. The aforesaid provisions do not materially affect the characteristics of the right of pre- (1) (1930) I.L.R. 11 Lah. 258.

(2) A.I.R. 1952 Punj. 206, 207.

emption as existed before the Act. They provide a convenient and effective procedure for disposing of together different suits, arising out of the same transaction, to avoid conflict of decisions, to fix the order of priority for the exercise of their rights and also to regulate the distribution of the preempted land between rival pre- emptors.

The provisions do not in any way enable the preemptor to exercise his right without establishing his superior right over the vendee or the person substituted in his place or to prevent the vendor or the vendee, by legitimate means, to defeat his right by getting substituted in place of the vendee a pre-emptor with a superior right to or an equal right with that of the plaintiff.

Nor can we accept the argument of the learned counsel for the appellants that s. 28 precludes the <ORG> from giving a decree for pre-emption in a case where the two suits were not joined together but one of the suits was decreed separately. Section 28 enacts a convenient procedure, but it cannot affect the substantative rights of the parties. We do not see that, if the plaintiffs were entitled to a right of pre-emption, they would have lost it by the appellants obtaining a decree before the plaintiffs instituted the suit, unless it be held that the decree itself had the effect of substituting them in place of the original vendees. We cannot, therefore, hold that the plaintiffs' suit is in any way barred under the provisions of the Act.

This leads us to the main question in this case, namely, whether the appellants having obtained a consent decree oil January 23, 1951, in their suit against the vendees and having paid the amount due under the decree and having taken delivery of the property and thus having got themselves substituted in place of the original vendees, can legitimately defeat the rights of the plaintiffs, who, by reason of the aforesaid substitution, were only in the position of pre-emptors of equal degree vis-a-vis the appellants and therefore ceased to have any superior rights. The learned Counsel for the respondents contends that the appellants are hit by the doctrine of lis pendens and therefore the act of substitution, which was effected on April 23, 1951, could not be in derogation of their right of pre-emption, which they have exercised by filing their suit on February 15, 1951. It is now settled law in the Punjab that the rule of lis pendens is as much applicable to a suit to enforce the right of pre-emption as to any other suit. The principle on which the doctrine rests is explained in the leading case of <NAME> v. <NAME> (1), where the Lord Chancellor said that pendente lite neither party to the litigation can alienate............ the property so as to affect his opponent. In other words, the law does not allow litigant parties, pending the litigation, to transfer their rights to the property in dispute so as to prejudice the- other party.

As a corollary to this rule it is laid down that this principle will not affect the right existing before the suit. The rule, with its limitations, was considered by <ORG> of <ORG> in <CITATION> (2). In that case, during the pendency of a pre-emption suit, the vendee sold the property which was the subject matter of the litigation to a person possessing a right of pre-emption equal to that of the pre-emptor in recognition of that person's right of pre-emption. This re-sale took place before the expiry of the period of limitation for instituting a pre-emption suit with respect to the original sale. <ORG> held that the doctrine of lis pendens applied to preemption suits; but in that case, the resale in question did not conflict with the doctrine of lis pendens. <NAME> gave the reason for the said conclusion at page 272 thus:

" All that the vendee does in such a case is to take the bargain in the assertion of his pre-existing pre-emptive right, and hence the sale does not offend against the doctrine of lis pendens ".

Another Full Bench of <ORG> accepted and followed the aforesaid doctrine in Mt. Sant Kaur v. <NAME> (3). In that case, pending the suit for pre-emption, the vendee sold the land purchased

(i) (1857) 1 De G. & J. 566; 44 E. R. 842.

(2) (1930) I.L.R. 11 Lah. 258, 273. (3) I.L.R. [1946] Lah. 467, by him to a person in recognition of a superior right of pre-emption. Thereafter, the second purchaser was brought onrecord and was added as a defendant to the suit. At the time of the purchase by the person having a superior right of pre-emption, his right to enforce it was barred by limitation. <ORG> held that that circumstance made a difference in the application of the rule of lis pendens. The distinction between the two categories of cases was brought out in bold relief at page 145 thus: " Where the subsequent vendee has still the means of coercing, by means of legal action, the original vendee into surrendering the bargain in his favour, a surrender as a result of a private treaty, and out of <ORG>, in recognition of the right to compel such surrender by means of a suit cannot properly be regarded as a voluntary transfer so as to attract the application of the rule of lis pendens. The correct way to look at the matter, in a case of this kind, is to regard the subsequent transferee as having simply been substituted for the vendee in the original bargain of sale. He can defend the suit on all the pleas which he could have taken had the sale been initially in his own favour. "

" However, where the subsequent transferee has lost the means of making use of the coercive machinery of the law to compel the vendee to surrender the original bargain to him, a re-transfer of the property in the former's favour cannot be looked upon as anything more than a voluntary transfer in the former's favour of such title as he had himself acquired under the original sale. Such transfer has not the effect of substituting the subsequent transferee in place of the vendee in the original bargain. Such a transferee takes the property only subject to the result of the suit. Even if lie is impleaded as a defendant in such suit, he cannot be regarded as anything more than a representative-in-interest of the original vendee, having no right to defend the suit except on the pleas that were open to such vendee himself ". This case, therefore, expressly introduces a new element in the applicability of the doctrine of lis pendens to a suit to enforce the pre-emptive right. If the right of the pre-emptor of a superior or equal degree was subsisting and enforceable by coercive process or otherwise, his purchase would be considered to be in exercise of that pre- existing right and therefore not hit by the doctrine of lis pendens. On the other hand, if he purchased the land from the original vendee after his superior or equal right to enforce the right of preemption was barred by Limitation, he would only be in the position of a representative-in- interest of the vendee, or to put it in other words, if his right is barred by limitation, it would be treated as a non- existing right. Much to the same effect was the decision of <ORG> of <ORG> in <NAME> v. <NAME> (1). There, before the institution of the suit for pre-emption, an agreement to sell the property had been executed by the vendee in favour of another prospective pre-emptor with an equal degree of right of pre- emption; subsequent to the institution of the suit, in pursuance of the agreement, a sale deed had been executed and registered in the latter's favour, after the expiry of the limitation for a suit to enforce his own pre-emptive right. The Full Bench held that the doctrine of lis pendens applied to the case. The principle underlying this decision is the same as that in Mt. Sant Kaur v. <NAME> (2), where the barred right was treated as a non-existent right. The same view was restated by <ORG> of <ORG> in <NAME> v. <NAME> (3). At p. 195, the learned Judges observed:

" It is settled law that unless a transfer pendente lite can be held to be a transfer in recognition of a subsisting pre- emptive right, the rule of lis pendens applies and the transferee takes the property subject to the result of the suit during the pendency where of it took place". <ORG> has applied the doctrine of lis pendens to a suit for pre-emption ignoring the limitation implicit in the doctrine that it cannot affect

(i) A.I.R. 1946 Lah. 322. (2) I.L.R. [1946] Lah. 467, (3) A.I.R. [1949 East Punj. [93.

a pre-existing right. ( <CITATION> (1)). We accept the view expressed by <ORG> and <ORG> in preference to that of <ORG>.

In view of the aforesaid four <ORG> decisions three of <ORG> and the fourth of <ORG> a further consideration of the case is unnecessary. The settled law in the Punjab may be summarized thus: The doctrine of lis pendens applies only to a transfer pendente lite, but it cannot affect a pre-existing right. If the sale is a transfer in recognition of a pre-existing and subsisting right, it would not be affected by the doctrine, as the said transfer did not create now right pendente lite ; but if the pre-existing right became unenforceable by reason of the fact of limitation or otherwise, the transfer, though ostensibly made in recognition of such a right, in fact created only a new right pendente lite.

Even so, it is contended that the right of the appellants to enforce their right of pre-emption was barred by limitation at the time of the transfer in their favour and therefore the transfer would be hit by the doctrine of lis pendens. This argument ignores the admitted facts of the case. The material facts may be recapitulated: Defendants 3 to 7 sold the land in dispute to defendants 1 and 2 on August 26, 1949, and the sale deed was registered on February 15, 1950. The appellants instituted their suit to pre-empt the said sale on August 26, 1950, and obtained a compromise decree on January 23, 195 1. They deposited the balance of the amount payable on April 23, 1951, and took possession of the land on May 17, 1951. It would be seen from the aforesaid facts that the appellants' right of pre-emption was clearly subsisting at the time when the appellants deposited the amount and took possession of the land, for they not only filed the suit but obtained a decree therein and complied with the terms of the decree within the time prescribed thereunder. The coercive process was still in operation. if so, it follows that the appellants are not hit by the

(i)A.I.R. 1927 All. 664.

VI doctrine of lis pendens and they acquired an indefeasible right to the suit land, at any rate, when they took possession of the land pursuant to the terms of the decree, after depositing in <ORG> the balance of the amount due to the vendors.

We shall briefly touch upon another argument of the learned Counsel for the appellants, namely, that the compromise decree obtained by them, whereunder their right of pre- emption was recognized, clothed them with the title to the property so as to deprive the plaintiffs of the equal right of pre-emption. The right of pre-emption can be effectively exercised or enforced only when the pre-emptor has been sub- stituted by the vendee in the original bargain of sale. A conditional decree, such as that with which we are concerned, whereunder a pre-emptor gets possession only if he pays a specified amount within a prescribed time and which also provides for the dismissal of the suit in case the condition is not complied with, cannot obviously bring about the substitution of the decreeholder in place of the vendee before the condition is complied with. Such a substitution takes effect only when the decree-holder complies with the condition and takes possession of the land.

The decision of <ORG> in <CITATION> (1) throws considerable light on the question whether in similar circumstances the pre-emptor can be deemed to have been substituted in the place of the original vendee. There the Subordinate Judge made a pre- emption decree under which the pre-emptors were in possession from 1900 to 1904, when the decree was reversed by <ORG> and the original purchaser regained possession and in 1908, <ORG>, upon further appeal, declared the pre-emptors' right to purchase, but at a higher price than decreed by the Subordinate Judge. In 1909 the pre-eimptors paid the additional price and thereupon again obtained possession. The question arose whether the pre-emptors were not entitled to mesne profits for the period between 1904 to 1909, i.e., during the period the judg-

(i)(1916) L. R. 44 1. A. 80.

ment of the first appellate Court was in force. <ORG> held that during that period the preemptors were not entitled to mesne profits. The reason for that conclusion was stated at page 84 thus:

" It therefore follows that where a suit is brought it is on payment of the purchase-money on the specified date that the plaintiff obtains possession of the property, and until that time the original purchaser retains possession and is entitled to the rents and profits. This was so held in the case of <CITATION> (1) and there <NAME> whose authority is well recognized by all, stated that it was only when the terms of the decree were fulfilled and enforced that the persons having the right of pre-emption become owners of the property, that such ownership did not vest from the date of sale, notwithstanding success in the suit, and that the actual substitution of the owner of the pre- empted property dates with possession under the decree ". This judgment is, therefore, a, clear authority for the position that the pre-emptor is not substituted in the place of the original vendee till conditions laid down in the decree are fulfilled. We cannot, therefore, agree with the learned Counsel that the compromise decree itself perfected his clients' right in derogation to that of the plaintiffs. But as we have held that the appellants complied with the conditions laid down in the compromise decree, they were substituted in the place of the vendee before the present suit was disposed of. In the aforesaid view, the other questions raised by the appellants do not arise for consideration. In the result, the appeal is allowed and the suit is dismissed with cost,-, throughout. Appeal allowed.

(1) (1889) I. L. R. 12 All. 234.


PETITIONER: COMMISSIONER OF INCOME-TAX, <NAME> Vs. RESPONDENT: <ORG>. DATE OF JUDGMENT: 07/12/1965 BENCH: <NAME>, K. BENCH: <NAME>, K. SHAH, J.C. SIKRI, S.M. CITATION: 1966 AIR 1026 1966 SCR (2) 925 CITATOR INFO : F 1967 SC 455 (10) ACT: Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, Para 2, proviso-Depreciation allowed to non- resident company in Part B States as well as in India- Fraction of total world income taken as Indian income- Depreciation allowed against total world income whether depreciation 'actually allowed' against Indian income---Computation of written down value after 1950. HEADNOTE: 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 ss. 4(1) (a) and 4(1)(c) read with s. 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 <ORG> having rejected this plea the matter went in reference to <ORG>. 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 <ORG> 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 <ORG>, 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 <NAME> and <NAME>, 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 s. 4(1)(a) or unders. 4(1)(c), read with s. 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 <ORG> was therefore correct. [933 <CITATION> , (1963) 47 I.T.R. 949, endorsed. Per <NAME>, J. (dissenting)-Under s. 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 s. 4A(c) its entire world income would be chargeable, subject of course to special exemptions like those provided in s. 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 s. 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 s. 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 s. 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] JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 629 to 632 of 1964.

Appeals from the order dated September 22, 1961 of <ORG> in Misc. Civil Case No. 277 of 1960.

<NAME>, <NAME>, <NAME> and <NAME>, for the appellant.

<NAME>, <NAME>, <NAME>, for the respondent.

The Judgment Of <NAME> and <NAME>, <NAME>. was delivered by <NAME>, <NAME> delivered a dissenting opinion. <NAME> 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.

<ORG>, 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 <ORG>s, including Madhya Bharat of which Indore became a part. Till the said date, the assessee was for many years assessed in <ORG>, 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 <ORG> in <ORG>, in order to rationalize the tax structure, <ORG> in exercise of the power conferred on it under s. 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 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, <ORG>, confirmed the orders of the Income-tax Officer. At the instance of the assessee, the following questions, among others, were referred to <ORG>, 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 <ORG> the third question was not pressed; and the second question was concluded by the decision of this Court in <CITATION> .(1). The correctness of the answers given by <ORG> 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, <ORG> held that the depreciation allowed for the years up to and including 1944 in the (1)  2 S.C.R. 318:  41 I.T.R. 280.

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 <ORG> question the correctness of the answers given by <ORG> in regard to questions 1 and 4 referred to it.

Mr. <NAME>, learned counsel for <ORG>, 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 <ORG>, 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. <NAME>, 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 S. 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-

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 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 s. 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 s. 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 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 s. 4 (1) (a) or under s. 4 (1) (c), read with s. 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 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.Rs. 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 <ORG> 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.

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 <ORG> in <CITATION> (1). We endorse the view expressed therein.

In the result, we hold that <ORG> has given correct answers to questions 1 and 4 referred to it. The appeals fail and are dismissed with costs.

<NAME>, 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 <ORG> as part of the Part B State of Madhya Bharat.

The Finance Act , 1950 by s. 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 <ORG> 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) 47 I.T.R. 949.

Sup. CI./66 13 Officer was confirmed by the Appellate Assistant Commissioner and <ORG>. The <ORG> referred under S. 66(1) of the Indian Income- tax Act four questions to <ORG> of Madhya Pradesh at Jabalpur. <ORG> did not answer questions Nos. 2 & 3, because one of the questions in view of the judgment of this Court <CITATION> - 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 ?"

<ORG> 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 <ORG>, 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 s. 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-s. (5) of S. 10 , written-down value in sub-s. (2) is defined. By virtue of S. 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)  2 S.C.R. 318 :41 I.T.R. 280 in that year exceeds its income arising without the taxable territories in that year.

Control and management of the affairs of the <ORG> 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 <ORG> 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 <ORG> under the Indian Income-tax Act in the years before 1950, the Income-tax Officer had, whether the <ORG> was assessed as resident or non-resident, to ascertain its world income, and for that purpose to take into account the depreciation allowable under S. 10(2) (vi) read with s. 10 (5) (b). Depreciation allowance in respect of the profits of the <ORG> 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 <ORG>. 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, <ORG> issued under s. 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."

But the expression "all depreciation actually allowed under any laws or rules of a Part B State" in paragraph 2 was ambiguous. <ORG> purported to issue a notification under s. 60A of the Indian Income-tax Act incorporating an Explanation to paragraph 2, but the notification was declared by <ORG> as invalid: <CITATION> (1). 'thereafter, <ORG> issued an amendment to the Order in exercise of the powers under s. 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) 20 I.T.R,206-

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 S. 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 S. 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 <ORG>, <ORG> 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 <ORG> :

"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."

<ORG> 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 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 <ORG> 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 S. 10 of the Income-tax Act taxable profits or gains earned by an assessee under the head "business" after making appropriate allowances under sub-s. (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 <ORG> 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 s. 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 <ORG>. 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 <ORG> the same rates of tax apply under the Indian Income-tax Act , whether the <ORG> is resident or non-resident. If the <ORG> is resident under s. 4A(c) its entire world income would be chargeable, subject of course to special exemptions like those provided by s. 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 <ORG> 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 <ORG> determined in the manner prescribed by s. 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 <ORG> 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 <ORG> 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 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.

There is therefore no warrant either in s. 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 <ORG> 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.