Full Judgment Text
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PETITIONER:
THE LIQUIDATORS OF PURSA LIMITED
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, BIHAR.
DATE OF JUDGMENT:
09/02/1954
BENCH:
DAS, SUDHI RANJAN
BENCH:
DAS, SUDHI RANJAN
MAHAJAN, MEHAR CHAND (CJ)
HASAN, GHULAM
JAGANNADHADAS, B.
CITATION:
1954 AIR 253 1954 SCR 767
CITATOR INFO :
E 1954 SC 470 (65)
D 1961 SC 398 (7,10,12,16)
R 1965 SC 33 (6)
F 1965 SC1358 (11,23)
RF 1969 SC 869 (5)
R 1971 SC 794 (12)
ACT:
Income-tax Act (XI of 1922) s. 10(2) (vii) proviso
2--Any such machinery or plant must have been used in the
accounting year--Section 66--Finding of fact--When appeal
court can intervene.
HEADNOTE:
The fundamental idea underlying the words used in
the definition of "business" in s. 2(4) of the Income-
tax Act the continuous exercise of an activity and the
same central idea is implicit in the words "carried on
by him" occurring in 10(1) and those critical words
are an essential constituent that which is to be produce
the taxable income, and therefore the
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tax is payable only in respect of the profits or gains of
the business which is carried on by the assessee.
That under clause (vii) of s. 10(2) the machinery
and plant must be such as were used at least for a part of
the accounting year. As the machinery and plant of the
sugar factory which were sold had not at all been used for
the purpose of business during the accounting year, the
second proviso to s.10. (2) (vii) could have no
application and the assessees were not liable.
Although the High Court will not disturb or go
behind a finding of fact of the Tribunal, it is well
settled that where it is competent for a Tribunal to
make findings of fact which are excluded from review,
the appeal court has always jurisdiction to intervene if it
appears either that the Tribunal has misunderstood the
statutory language because the proper construction of the
statutory language is a matter of law or that the
Tribunal has made a finding for which there is no evidence
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or which is inconsistent with the evidence and contradictory
of it.
Commissioner of Income tax v. Shaw Wallace and
Company (L.R. 59 I.A. 206), and Commissioners o/Inland
Revenue v. Fraser (24 Tax Cases 498) referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
33 of 1953.
Appeal by special leave from the Judgment and Order
dated the 16th May, 1951, of the High Court of Judicature
at Patna in Miscellaneous Judicial Case No. 126 of
1950, arising out of the Order dated the 17th May,
1949, of the Income-tax Appellate Tribunal,
Calcutta Bench, Calcutta, in I.T.A. No. 147 of 1948-49.
sukumar Mitra (S. N. Mukherjee with him) for the
appellant.
C.K. Daphtary,. Solicitor-General for India (Porus A. Mehta,
with him) for the respondent
1954. February 9. The Judgment of the Court was delivered
by
DAS J.--This is an appeal by special leave from the
judgment of the Patna High Court delivered on a reference
made by the Income-tax Appellate Tribunal under
section 66(1) of the Indian Income tax Act.
The tribunal referred the following two questions for
the opinion of the High Court:
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1. On the facts and in the circumstances of this
case is the surplus of Rs. 13,05,144 arising out of the
sale of the plant and machinery of the sugar factory
chargeable under section 10 (2) (vii) ?
2. Was the profit of Rs. 15,882 on the sale of
stores of the factory taxable under the Income-tax Act in
the circumstances of this case ?
The reference came up for hearing before a Division
Bench consisting of Shearer and Sarjoo Prasad JJ. and
after a prolonged hearing the learned Judges delivered
separate judgments on the27th February. 1951, giving
divergent answers to the questions, Shearer J.
answering both the questions in the negative and Sarjoo
Prasad J. giving an affirmative answer to both of them.
The matter thereupon was placed before a third
Judge, Ramaswami J. who, after a fresh hearing
delivered his judgment on the 16th May, 1951, agreeing
with Sarjoo Prasad J. on the first question and with Shearer
J. on the second question. The result was that the High
Court by a majority decision answered the first
question in the affirmative, i.e., against the assessee,
and the second question in the negative, i,e. in
favour of the assessee.
The assessee applied to the High Court for leave to
appeal to this court against the High Court’s decision on
the first question. The High Court having declined to
grant the necessary certificate the assessee applied for
and obtained the special leave of this court to
prefer the present appeal. The department has not
preferred any appeal against the High Court’s decision on
the second question and nothing further need be said
about that question.
The controversy arose in course of the proceedings for
the assessment of Pursa Ltd. to income-tax for the
assessment year 1945-46, the relevant accounting year
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covering the period between the 1st October, 1943, to
30th September, 1944. Pursa Ltd., was a company
incorporated in 1905 under the Indian Companies Act but all
its shareholders and directors were residents in the
United Kingdom. The business of the
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company was that of growers of sugarcane,
manufacturers of sugar and dealers in sugar. It is
common ground that the crushing season for the manufacture
of sugar is from December to April of each year. It
appears that towards the end of 1942 an attempt was made
to sell the entire business of the company but such attempt
did not succeed. It appears from the case filed by the
respondent in tiffs appeal that in the middle of 1943 the
directors of the company commenced negotiations for the
sale of the factory and other assets of the company with
the ultimate object of winding up the company. From the
correspondence, affidavit and other materials placed before
the tribunal and referred to by Sarjoo Prasad J. in his
judgment it appears that on the 9th August, 1943, an
inventory was prepared and a firm offer was received from
Dalmia lain & Company Ltd., for the purchase of the
factory and stores as on that date. This offer was on the
16th August, 1943, communicated by cable to the
directors in England. On the 20th August, 1943, the
directors, asked the local managers in India to proceed with
the matter in anticipation of the sanction of the
shareholders which the directors expected to obtain at an
extraordinary general meeting to be held very shortly.
That meeting, however, was held on the 8th October, 1943,
i.e., 8 days after the accounting year had started., At that
meeting the firm offer of Dalmia lain & Company Ltd. was
accepted and a concluded agreement for sale came into
existence. Thereafter instructions were given to the
solicitors to draw up the necessary documents.
On the 7th December, 1943, a written memorandum of
agreement was executed whereby the company agreed to
sell and demise to Dalmia Jain & Company Ltd., free from
all mortgages and charges at and for the price of rupees
twenty-eight lacs all the lands, buildings, machinery
and plant and all vats, reservoirs, cisterns, pumps,
machinery, engines, boilers, plant, implements,
utensils, tramways, furniture, stores, articles and
things as on the ninth day of August, one thousand nine
hundred and forty-three (subject to subsequent use and
consumption in the ordinary course
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of business) used in connection with the said sugar
factory, but excepting stocks of manufactured sugar and
stocks of grain in godown on the ninth day of August, one
thousand nine hundred and forty-three and all stores and
other articles bought or received by the company after the
date. Dalmia Jain & Company Ltd., paid the sum of rupees
twenty-eight lacs on the same day and on the 10th December,
1943, they got possession of the factory. On the date of
the aforesaid sale, the company possessed sugar stock
valued at rupees six lacs which was excluded from the
sale. This stock of sugar the company continued to sell
up to June, 1944. It is said that the said stock of sugar
was excluded because at the time it was not possible to
know at what date such a sale would be concluded and the
sugar produced in 1943 had to be sold by and through the
exclusive selling agents of the company under a contract
entered into with them. It is, however, not disputed that
between the 9th August, 1943, when the firm offer was
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obtained and the 10th December, 1943, when possession of the
factory was made over to Dalmia Jain & Company Ltd., the
company never used the machinery and plant for the purpose
of manufacturing sugar or for any other purpose except that
of keeping them in trim and running order. Indeed,
throughout the accounting period the machinery and plant
were not used by the company.
The company went into voluntary liquidation on
the 20th June, 1945. The reason for the delay in
putting the company into liquidation is said to have been
caused by considerable legal difficulties with regard to the
transfer of certain mokarari lands belonging to the
company. The liquidators appointed by the shareholders
of the company represented the company in the matter
of proceedings for assessment of the company for the
assessment year 1945-46.
In the course of these assessment proceedings the
Income-tax Officer on the 21st February, 1947, wrote a
letter to the liquidators asking for elucidation on
certain points. Amongst other things, the Income tax
Officer wanted to know the liquidators’ objection why
the company’s activities during the previous
772
year might not be treated as amounting to a realisation of
assets on impending liquidation rather than to the carrying
on of business within the meaning of the Income-tax Act.
To this letter an answer was sent by the liquidators . on
the 19th March, 1947, pointing out that the company had
gone into liquidation on the 20th June, 1945, and that in
view of the date of liquidation the liquidators could not
agree that the company was not carrying on business
during the year ended 30th September, 1944, and they
further pointed out that the various debits contained
in the sugar factory accounts were those incurred in
carrying on the company’s business. By his letter dated
the 17th May, 1947, the Income-tax Officer claimed
that large profits which had been made by the company on the
sale of their machinery and plant were taxable under the
second proviso to section 10 (2)(vii)of the Income-tax Act
and called upon the liquidators to retain sufficient
funds and assets in their hands to meet the heavy tax
liabilities that might eventually arise and also to
warn the shareholders accordingly. He also asked for
certain information which, however, the liquidators did
not furnish. The liquidators, in their letter in reply
dated the 22nd May, 1947, did not agree that the profits
were taxable, for the profits to which reference had been
made were not profits arising from a business carried
on by the company but were profits arising from the
company ceasing to carry on business. The Income-tax
Officer, however, by his order dated the 21st June,
1947, held that the profits of the sale of machinery
and plant were liable to assessment under section 10
(2)(vii)of the Act and added a sum of Rs. 13,05,144
to the profits.
The Appellate Assistant Commissioner of Income-tax
having dismissed the liquidators’ appeal on the 30th
January, 1947, the liquidators went up on further appeal to
the Income-tax Appellate Tribunal. By its order dated the
17th May, 1949, the tribunal dismissed that appeal.
Upon an application under section 66(1) of the Act the
tribunal stated a case to the High Court referring the two.
questions herein before
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set out. The subsequent history of the matter has
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already been mentioned and needs no reiteration. The
relevant portion of section 10 of the Income-tax Act as
amended by Act VI of 1939was as follows :--
"10 (1) The tax shall be payable by anassessee under
the head "Profits and gains of business, profession or
vocation" in respect of the profits or gains of any
business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making
the following allowances, namely :-
(i) ........................................
(ii) ........................................
(iii) ........................................
(iv) in respect of insurance against risk of damage or
destruction of buildings, machinery, plaint, furniture,
stocks or stores, used for the purposes of the business,
profession or vocation, the amount of any premium paid;
(v) in respect of current repairs to ’such buildings,
machinery, plant, or furniture, the amount paid on account
thereof;
(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:
(vii) in respect of any machinery or plant which has been
sold or discarded, the amount by which the written down
value of the machinery or plant exceeds the. amount for
which the machinery or plant is actually sold or its
scrap value:
Provided that such amount is actually
written off in the books of the assessee:
Provided further that where the amount for which
any such machinery or plant is sold exceeds the written
down value, the excess shall be deemed to be profits of
the previous year in which the sale took place;
............................................
............................................."
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It is necessary to bear in mind the meaning and import
of the provisions of section 10 (2)(vii)in so far as they
apply to the present case.
Under section 10 tax is payable by an assessee "in
respect of the profits or gains of any business,
profession or vocation carried on by him." "Business"
is defined by section 2, sub-section (4) as "including
any trade, commerce or manufacture, or any adventure or
concern in the nature of trade, commerce or
manufacture." As pointed out by the Judicial Committee
in Shaw Wallace & Co.’s case(1) the fundamental idea
underlying each of these words is the continuous
exercise of an activity and the same central idea
is implicit in the words "carried on by him" occurring
in section 10 (1)and those critical words are an
essential constituent of that which is to produce the
taxable income. Therefore, it is clear that the tax is
payable only in respect of the profits or gains of the
business which is carried on by the assessee. Sub-section
(2)permits allowances to be made before the
taxable profits are ascertained. Proviso (2)to clause
(vii) of that sub-section on which the income-tax
authorities have relied makes the excess of sale
proceeds over the written down value of "any such
machinery or plant" to be deemed to be profits of the
previous year in which the sale took place. Any such
machinery or plant in the proviso clearly refers to
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the machinery or plant in respect of which the allowance is
to be given under that clause. Although the word "such"
was not used in the body of clause (vii), the scheme of
sub-section (2) which is apparent from the other clauses
of allowances e.g., (iv), (v) and (vi), clearly indicates
that the machinery or plant referred to in clause (vii)
must be the same as those mentioned in the earlier
clauses, i.e., such machinery or plant as were "used for
the purposes of the business, profession or vacation."
Indeed, the position has been made clear and placed
beyond any doubt by the subsequent amendment of 1946 which
added the word "such" in clause (vii). The words"used
for the purposes of the business" obviously
[1] L. R, 59 I.A. 206 at p. 213.
775
mean used for the purpose of enabling the owner to carry
on the business and earn profits in the business. In other
words, the machinery or plant must be used for the purpose
of that business which is actually carried on and the
profits of which are assessable under section 10 (1). The
word "used" has been read in some of the pool cases in a
wide sense so as to include a passive as well as
active user. It is not necessary, for the purposes of
the present appeal, to express any opinion on that
point on which the High Courts have expressed
different views. It is, however, clear that in order
to attract the operation clauses (v), (vi) and (vii) the
machinery and plant must be such as were used, in whatever
sense that word is taken, at least for a part of the
accounting year. If the machinery and plant have not
at all been used at any time during the accounting year no
allowance can be claimed under clause (vii) in respect
them and the second proviso also does not come into
operation.
In its statement of the case, after referring to its
decision that the profits on the sale of machinery and plant
were assessable under section 10 (2)(vii), the tribunal
proceeded to state:
"This decision was based on two considerations.
First, that as admitted by the applicant company the
company had been carrying on its business up to the date
of the sale of the machinery, namely, 7th December,
1943. ’The tribunal was of the opinion that as the
applicant company had not ceased to carry on its
business till the date of the sale of the machinery, it
must be held that the sale of the ’machinery was a
part of the applicant company’s carrying on of the
business. The second reason for the decision of the
tribunal was that the applicant company did not sell its
sugar stocks amounting to over Rs.6,00,000, on 7th
December, 1943. The applicant company s plea that the
sugar stocks could not be sold as the applicant company
had sole agents for the sale of sugar, was not accepted by
the tribunal. The’ Income-tax Appellate Tribunal found
that sugar continued to be sold for more than 6 months
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after the sale of the machinery and substantial
expenses on establishment and general charges
continued to be incurred. From this the Income-tax
Appellate Tribunal concluded that the sugar stocks
had not been sold on 7th December; 1943, purposely in
order to sell these to the best advantage later on.
This, the Income-tax Appellate Tribunal held, showed that
the applicant company carried on business even subsequent
to the sate of machinery on ’7th December, 1943."
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Although the High Court will not disturb or go
behind the finding of fact of the tribunal, it is now well
settled that where it is competent for a tribunal to make
findings in fact which are excluded from review, the
appeal court has always jurisdiction to intervene if it
appears either that the tribunal has misunderstood the
statutory language--because the proper construction of
the statutory language is a matter of law--or that the
tribunal has made a finding for which there is no
evidence or which is inconsistent with the evidence and
contradictory of it. [See Lord Normand in Commissioners of
Inland Revenue v. Fraser(1)]. It appears to us that the
tribunal misdirected itself in law as to the meaning and
import of the relevant provisions of section 10 of the
Act. ]t completely overlooked the fact which is
plainly in evidence on the record that the machinery
and plant which were sold had not at all been used for the
purposes of the business carried on in the accounting year
and consequently the second proviso to section 10 (2) (vii)
could have no application to the sale proceeds of such
machinery and plant. In fact the entire decision of
the tribunal was vitiated by its failure to keep in view the
true meaning and scope of section 10 (2) (vii) and cannot,
therefore, be supported.
It further appears to us that in the statement of the
case the tribunal was not merely stating something in the
nature of a primary fact but was also drawing a conclusion
which is to a certain extent contrary to the primary
finding. As is stated clearly in the statement of the case,
the decision of the tribunal was based on
(1) 24 Tax Cas. 498 at p. 501.
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two considerations. The first consideration was rounded
on an admission by the liquidators that the company
had been carrying on its business up to the date of the sale
of the machinery on the 7th December, 1943. This admission
is quite consistent with the case that the company was only
selling its stock of sugar and not doing any business of
manufacture of sugar. Indeed, the manufacturing process
does not begin until December of each year and the
memorandum of agreement was made on the 7th December, 1943,
and possession was delivered to the purchaser on the 10th
December, 1943. It is nobody’s case and it has not been
found that the company had manufactured any sugar during the
whole of the accounting year. Therefore, this finding that
the company carried on its business up to the 7th December,
1943, certainly does not indicate that the company was also
carrying on any business of ’growing sugarcane or
manufacturing sugar by the use of the machinery or plant in
question. The second finding that the company carried on
business even after the sale of the machinery and the plant
clearly indicates that that business had nothing to do with
the machinery or plant. Both the findings, therefore, are
inconclusive. The matter, however, does not rest there. It
appears to us that the findings of fact, taken literally,
cannot support the decision of the tribunal. If, as
held by the tribunal, "the sale of the machinery was a
part of the applicant company’s carrying on of the
business" then the sale must be regarded as an ordinary
operation of such business and consequently the profits
arising out of such ordinary business operation would be
assessable under the provisions of section 10 (1) and it
would not be necessary to have recourse to the statutory
fiction created by the second proviso to clause (vii)under
which the excess of the sale proceeds over the written down
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value is to be deemed to be profits of the business. If the
profits on the sale of the machinery and plant are to be
made assessable under the second proviso, as has’ been
done by the tribunal, then it must be conceded that these
deemed profits were not in reality the profits of the
business carried on by the
(2) 24 Tax Cases 498 at p. 501.
13--95 S. C.I./59
778
company and, therefore, the sale transaction which
brought in these profits was not in fact part of the
company’s business, which conclusion again will be
inconsistent with the finding of fact if the business is
not understood as limited only to the selling of sugar.
For reasons stated above, it appears to us that having
misdirected itself in law as to the scope and effect of
the relevant portions of section 10 of the Act the tribunal
did not approach the facts from a proper angle and, further,
that its findings cannot, in the circumstances of this
case, be given such sanctity as would exclude the same
from review by the High Court or this court. Turning to
the facts to be gathered from the records it is quite
clear that the intention of the company was to
discontinue its business and the sale of the machinery and
plant was a step in the process of the winding up of its
business. The sale of the machinery and plant was not an
operation in furtherance of the business carried on by
the company but was a realisation of its assets in
the process of gradual winding up of its business which
eventually culminated in the voluntary liquidation of the
company. Even if the sale of the stock of sugar be
regarded as carrying on of business by the company and not a
realisation of its assets with a view to winding up, the
machinery or plant not being used during the accounting year
at all and in any event not having had any connection with
the carrying on of that limited business during the
accounting year, section 10 (2) (vii) can have no
application to the sale of any such machinery or plant. In
this view of the matter, the answer to the first
question should be in the negative and we answer
accordingly.
The result is that this appeal is allowed and the
respondent shall pay the costs of the appellants both in
this court and in the High Court.
Appeal allowed.
Agent for the appellant:B. N. Ghose.
Agent for the respondent: G.H. Rajadhyaksha.
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