Judgement

SIKRI, J.: These appeals by special leave are directed against the judgment of the High Court of Madhya Pradesh in a reference made to it by the Income-tax Appellate Tribunal, under S. 66(1) of the Indian Income-tax Act, 1922, hereinafter referred to as the Act. The Tribunal referred the following to the High Court:

"Whether, on the facts of the case and having regard to the provisions of paragraph 2 of the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, and Cl. 8 of the Agreement made on 20th September, 1938 between the assessee and the State or Bhopal, the correct basis for computing the written down value of the depreciable assets as at 1st November, 1948 is the one which is adopted by the Income-tax Officer or the one adopted by the Appellant Assistant Commissioner?

2. The relevant facts are these. The respondent. M/s. Straw Products Ltd., Bhopal, hereinafter called the assessee, is a public limited company. It was incorporated in the erstwhile State of Bhopal in 1939 and was given the certificate of commencement of business on May 30, 1939. On September 20, 1938, the assessee entered into an agreement with the Government of Bhopal. Under the agreement the assessee obtained certain concessions and facilities The assessee not only got exclusive licence to manufacture card-board articles of all kinds but also got land on lease on favourable terms. It was also exempted from payment of customs and other duties payable to the municipality. Clause 8 of the agreement is relevant for the purpose of these appeals and is in the following terms:

"8. Subject to and so far as the State shall not become or become obliged by any Instrument of Accession or Supplementary Instrument under the Government of India Act, 1935, in respect of any Federal Taxation, it is hereby agreed as follows:

(a) During the period of 10 years from the date on which the said Company takes over the land for its business purposes the said Company shall not be liable to pay any sum by way of taxation to the State.

3. It is common ground that this Agreement was acted upon and for a period of 10 years the assessee was not called upon to submit any returns of income and no assessment was made on the assessee under the Bhopal Income-tax Act. This period of ten years expired on October 31, 1948. On August 1, 1949, Bhopal merged in India and was formed into a Chief Commissioner s Province.

4. For the assessment year 1949-50, the assessee was assessed under the Indian Income-tax Act, 1922, on the total income of the period November 1, 1948, to December 12, 1948, as the assessee made up its accounts on the 31st December each year. For the assessment years 1952-53 and 1953-54, the assessment years which are the subject-matter of this reference (previous years Calendar years 1951 and 1952, respectively), the Income-tax Officer, by orders dated November 27, 1952 and September 30, 1953, allowed depreciation on the machinery, buildings and others assets owned by the assessee on the basis of the original cost, i.e. the cost paid in 1939. Subsequently noticing a report in the Times of India, dated March 15, 1957, giving the view taken by the Bombay High Court in the case of Dhrangadhara Chemical Works Limited, In re, I. - T. Ref. No. 60 of 1956 dated 14-2-1957 (Bom), the Income-tax Officer initiated action under S. 34(1) of the Act in respect of these two assessment years. In the Dhrangadhara Chemical Works case, I. - T. Ref. No. 60 of 1956 dated 14-2-1957 (Bom ) the Bombay High Court had held that the written down value on the opening day of the account period for which assessment is to be made under the Indian Income-tax Act should be taken at the actual cost less the depreciation which could have been claimed under the Indian Income-tax Act, 1922. After hearing the assessee s objections, the Income-tax Officer by his order dated March 4, 1958, held that "the written down value of the assets of the company will have to be redetermined as on 1st Januar