Full Judgment Text
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PETITIONER:
THE COMMISSIONER OF INCOME-TAX, BOMBAY CIRCLE II
Vs.
RESPONDENT:
THE NATIONAL SYNDICATE, BOMBAY.
DATE OF JUDGMENT:
01/11/1960
BENCH:
HIDAYATULLAH, M.
BENCH:
HIDAYATULLAH, M.
DAS, S.K.
SHAH, J.C.
CITATION:
1961 AIR 398 1961 SCR (2) 229
CITATOR INFO :
D 1965 SC 33 (6)
R 1971 SC2274 (7)
ACT:
Income-Tax--Business carried out for a part of the
year--Computation--If must be for the whole year--Indian
Income-Tax Act, 1922-(11 of 1922) s. 10(2)(Vii).
HEADNOTE:
The National Syndicate, a Bombay firm, acquired on January
11, 1945, a tailoring business as a going concern for Rs.
89,321 which included the consideration paid for sewing
machines and a motor lorry. Soon after the purchase the
respondent found it difficult to continue the business,
therefore closed its business in August, 1945. Between
August 16, 1945, and February 14, 1946, sewing machines and
the motor lorry were sold at a loss. The respondent closed
its account books on February 28, 1946, showing the two
losses and writing them off.
For the assessment year 1946-47, the. respondent claimed a
deduction under s. 10(2)(Vii) of the Indian Income Tax Act.
The Appellate Tribunal held that the sales of machines and
the motor lorry were made in the course of the winding up of
the assessee’s business after the business had been stopped
and that, therefore, the deduction could not be claimed
under s. 10(2)(Vii). Respondent moved the High Court and
obtained an order under s. 66(2) of the Income-Tax Act, and
the following two questions were referred :-
" (1) Whether the Tribunal was justified in law in holding
that the petitioner had carried on its business only till
twenty eight day of August, One Thousand Nine Hundred and
Forty Five ?
(2) Whether on the facts and circumstances of the case, the
Income Tax Appellate Tribunal was justified in law in not
allowing the sum of Rs. 41,998 (Rupees forty-one thousand
nine hundred and ninety eight) on sale of machines and Rs.
3,700 (Rupees three thousand and seven hundred) on the sale
of lorry as a deduction from the total income of the
applicant ?"
The High Court answered the first question in the affirma-
tive, and the second question in the negative.
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The Commissioner of Income-tax questioned the finding of the
High Court and came up in appeal by special leave and con-
tended that an allowance could only be claimed if sale of
machines, etc. took place when the business was being
continued and not if the business had come to a close. The
respondent on the other hand submitted that s. 10(2)(Vii)
would be applicable
230
in a case where the business continued for a part of the
account year, even though the sale of machinery, plant, etc.
took place after the closure of the business during the
course of the account year.
Held, that if the profits or gains of a business for a
particular year are to be taxed, they must be computed for
the whole year taking into account losses incurred during
the same year, provided that the business had been " carried
on by the assessee " ; the building, machinery or plant had
been " used for the purpose of the business "; the sale etc.
had taken place during the year of account, and the loss had
been brought into the books of the assessee and written off.
There is no other condition to be found expressly in the
section or in the Act. It is nowhere stated that the
business of the assessee should have been carried on for the
whole year, or that the machinery or plant should have been
used for the whole of the accounting period. There are no
words which would show that, if the assessee worked only for
a part of the year and then sold out, the loss that he
incurred was not a business loss, or that he must pay tax on
the small profit that he might have made, and bear the loss
in addition.
The Liquidators of Pursa Limited v. Commissioner of Income-
Tax, Bihar, [1954] S.C.R. 767, Commissioner of Income-tax v.
Express Newspapers Ltd. (1960) 40 I.T.R. 38, distinguished.
Indian Iron & Steel Co., Ltd. v. Commissioner of Incometax,
Bengal, (1943) 11 I.T.R. 328, Commissioner of Income-tax v.
Shaw Wallace & Co., Ltd., (1932) L.R. 59 I.A. 206, referred
to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 280 of 1959.
Appeal by special leave from the judgment and order dated
the 22nd August, 1956, of the former Bombay High Court in
Income-tax Reference No. 17 of 1956.
B. Ganapathy Iyer and D. Gupta, for the Appellant.
Sanat P. Mehta, S. N. Andley, J. B. Dadachanji, Rameshwar
Nath and P. L. Vohra, for the Respondent.
1960. November 1. The Judgment of the Court’ was delivered
by
HIDAYATULLAH J.-The Commissioner of Incometax, Bombay Circle
II, has filed this appeal after obtaining special leave,
against the judgment of the High Court of Bombay in an
Income-tax reference
231
under s. 66(2) of the Income-tax Act. The National
Syndicate, Bombay (referred to in this judgment as the
respondent) was a firm consisting of three partners. This
firm acquired on January 11, 1945, a tailoring business as a
going concern from one Chambal Singh for Rs. 89,321/-.
Included in this amount was the consideration paid for
sewing machines (Rs. 72,000) and a motor lorry (Rs. 8,000).
The assessment concerns the year of account of the
respondent, January 11, 1945 to February 28, 1946. The
business of the respondent was to prepare garments for
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Government departments, and during the war years, this
appears to have been a profitable business. Immediately
after the respondent acquired this business, the last war
came to an end, and the respondent found it difficult to
continue the business. It, therefore, closed its business
in August, 1945. Between August 16, 1945 and February 14,
1946, sewing machines were sold at a loss of Rs. 41,998.
The motor lorry was also sold on February 14,1946, at a loss
of Rs. 3,700. The respondent closed its account books on
February 28, 1946, showing the two losses and writing them
off.
For the assessment year, 1946.47, the respondent claimed a
deduction of Rs. 45,698 under s. 10(2)(vii) of the Indian
Income-tax Act. The Income-tax Officer disallowed this
deduction, holding that the loss was of a capital nature,
and that inasmuch as the business of the respondent was not
carried on after August 1945 s. 10(2)(vii) was not
applicable. This order of assessment was confirmed by the
Appellate Assistant Commissioner, who also held that the
loss represented capital loss, as the machines and the motor
lorry were sold after the closure of the business. On
appeal, the Appellate Tribunal, Bombay, also confirmed the
order, holding that the sales of machines and the motor
lorry were made in the course of the winding up of the
assessee’s business after the business had been stopped, and
that, therefore, the deduction could not be claimed under s.
10(2Xvii).
The respondent asked the Tribunal to refer the questions of
law arising from its order, but the request was refused. It
then moved the High Court, and
232
obtained an order under s. 66(2) of the Income-tax Act, and
the following two questions were referred:
" (1) Whether the Tribunal was justified in law in holding
that the Petitioner had carried on its business only till
twenty-eighth day of August one thousand nine hundred and
forty-five ?
(2) Whether on the facts and circumstances of the case, the
Income-tax Appellate Tribunal was justified in law in not
allowing the sum of Rs. 41,998 (Rupees forty-one thousand
nine hundred and ninety eight) on sale of machines and Rs,
3,700 (Rupees three thousand and seven hundred) on the sale
of lorry as a deduction from the total income of the
applicant?"
The High Court answered the first question in the
affirmative, holding that there was evidence on which the
Tribunal could reach the conclusion that the business had,
in fact, been continued only till August 28, 1945. On the
second question, the High Court was of the opinion that the
business having been carried on for at least a part of the
account year, s. 10(2)(vii) was applicable, and that,
therefore, this allowance had to be made under that clause.
The High Court, therefore, answered the question in the
negative. The High Court refused to grant a certificate to
appeal to this Court, but the Commissioner of Income-tax
applied for, and obtained special leave, and this appeal has
been filed.
Before we deal with the question whether s. 10(2) (vii) of
the Indian Income-tax Act is applicable to the facts of this
case, we may mention that during the course of the argument
Mr. S. P. Mehta, counsel for the respondent, sought to re-
open the first question. According to him, there was no
evidence on which the Tribunal or the High Court could reach
the conclusion that the business of the respondent had come
to a close in August 1945. We, however, did not permit him
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to raise this contention, partly because, in our opinion,
such a contention could not be allowed to be raised at this
stage in an appeal by the Department and partly because, in
our opinion, there were adequate materials for the High
Court to have based its conclusion. Inasmuch as we were in
agreement
233
with the High Court on the question of the applicability of
s. 10(2)(vii), we also felt that no useful purpose would be
served in examining the matter to find out whether the
business had, in fact, closed on August 28, 1945 or had
continued till the end of the account year.
We are really concerned in this appeal with the
interpretation of s. 10(2)(vii) and its applicability to the
facts of the case. It may be assumed for the purposes of
this case that the business did, in fact, close down on
August 28,1945, even though some in comings and outgoings
were taking place for the rest of the year and the books of
account were not finally closed till February 28, 1946. The
Commissioner contends that an allowance could only be
claimed if the sale of machines etc., took place when the
business was being continued and not if the business had
come to a close. The respondent, on the other hand, submits
that s. 10(2)(vii) would be applicable in a case where the
business continued for a part of the account year, even
though the sale of the machinery, plant etc., took place
after the closure of the business during the course of the
account year.
Section 10(2)(vii) reads as follows:
" 10(2). Such profits or gains shall be computed after
making the following allowances, namely:-
(vii) in respect of any such building, machinery or plant
which has been sold or discarded or demolished or destroyed,
the amount by which the written down value thereof exceeds
the amount for which the building, machinery or plant, as
the case may be, is actually sold or its scrap value:
Provided that such amount is actually written off in the
books of the assessee:".
The Commissioner emphasises the word " such " in the clause,
and states that this takes us back to cl. (iv) where the
words " used for the purposes of the business occur. It is,
therefore, contended that if the business itself comes to an
end before the sale takes place, the sale is not during the
continuance of the
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business but is during the course of the winding up ,of the
business, and the condition precedent to the application of
s. 10 is that the business must be is carried on " by the
person claiming the benefit of sub-s. (2). Reference in
this context is made to the first sub-section of s. 10,
where it is provided that the tax ’shall be payable by an
assessee under the head " Pro. fits and gains of
business........ in respect of the profits or gains of any
business, etc., ’ carried on by him’." The Department relies
upon a decision of this Court reported in The Liquidators of
Pursa Limited v. Commissioner of Income-tax, Bihar (1). The
respondent also relies upon the same ruling, and contends
that it supports the case set up by it. The respondent also
relies on a recent decision of the Madras High Court in
Commissioner of Income-tax v. Express Newspapers Ltd. (2).
These two cases were decided under the second proviso to s.
10(2)(vii) before its amendment in 1949. The second proviso
reads:
" Provided further that where the amount for which any such
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building, machinery or plant is sold whether during the
continuance of the business or after the cessation thereof,
exceeds the written down value, so much of the excess as
does not exceed the difference between the original cost and
the written down value shall be deemed to be profits of the
previous year in which the sale took place."
The words underlined above were inserted by s. 11 of the
Taxation Laws (Extension to Merged States and Amendment)
Act, 1949.
In both the cases, the business had admittedly closed down
before the sales took place, and it was held, applying the
proviso as it was before the amendment of 1949, that such
receipts were not taxable. The amendment now renders these
cases obsolete. Reliance is, however, placed on certain
observations in these oases, and it is contended that the
same reasoning must be applied to a case of loss as to a
case of profits. We shall, therefore, refer briefly to
them.
In The Liquidators of Pursa Limited v. Commissioner of
Income-tax, Bihar (1), the year of, assessment
235
was 1945-46, which corresponded to the accounting year,
October 1, 1943 to September 30, 1944. Pursa Limited were
manufacturers of sugar, and sold the business on August 9,
1943, including buildings, machinery and plant but excluding
manufactured sugar worth about Rs. 6,00,000. This sugar was
sold till June, 1944; but throughout the accounting period,
the machinery, plant or buildings were not used. Pursa
Limited went into voluntary liquidation on June 20, 1945.
In the sale of the buildings, machinery and plant there was
an excess, such as is described in the second proviso, and
that amount of excess was sought to be taxed. This was
negatived by this Court on two grounds. They were (a): " 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 of them and the second proviso
also does not come into operation "; and (b) " 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 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".
Counsel differ as to the ratio of the case. The
Commissioner contends that the ratio is that no sale,
whether at a loss, or at a profit can be said to fall
within, respectively, cl. (vii) or the second proviso, if it
takes place after the closure of business and during the
process of winding up, while the respondent contends that
the real ratio was that during the account year the
machinery and plant were not at all used. No doubt, this
Court did give two reasons for its decision, but the primary
consideration was the second ratio quoted above. This is
clear from the following passage towards the end of the
judgment:
" 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
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machinery or plant not being used during the accounting
period 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
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to the sale of any machinery or plant."
Learned Counsel for the respondent relies upon the passage
last quoted, and urges that where the buildings, machinery
or plant have been used for a part of the accounting period,
the ruling cannot apply, and draws attention to the words "
at all " used twice in the judgment. He argues that if the
machinery or plant had been used for a part of the
accounting year, the result would have been different. It
is not possible to say how the case would have been decided
in the changed circumstances, but it is obvious that the
case is distinguishable on more than one ground. The
proviso is in a language different from cl. (vii), as a
fiction is introduced and such ’ profits’ are taxed to take
back what had been given away for depreciation which did not
really take place. But more of it later.
Express Newspapers Ltd. case (1) is also distinguishable.
In that case, the Free Press of India (Madras) Ltd. resolved
on August 31, 1946, to transfer the right of printing and
publishing its daily newspapers to Express Newspapers Ltd.
They rented out their machinery, etc., to the new Company,
which took possession on September 1, 1946. The year of
account ended on December 31, 1946. The Free Press went
into voluntary liquidation on October 31, 1946 and on
November 1, 1946, its building, machinery and plant were
sold to the new Company at a price which exceeded the
written down value by Rs. 6,08,666 made up of Rs. 2,14,090
being the excess of the original cost price over the written
down value, and Rs. 3,94,576 being the excess over the
original cost price. One question, among others, was
whether the second proviso to s. 10 (2)(vii). applied. The
Madras High Court ob. served :
(1) (1960) 40 I.T.R. 38.
237
"...... in the present case the sale of the machinery took
place during the year of account, and it was used by Free
Press Company for at least a part of the year. This would
be sufficient to attract liability.. The learned counsel for
the assessee is on a firmer ground when he contended that
the sale being made in the process of winding up of the
company section 10(2)(vii) will not apply. The second
proviso to section 10(2)(vii) would be invoked only where
the sale was one made in the course of business carried on
by the predecessor. Where the sale is a closing down sale,
that profit could not be brought to tax. In Liquidators of
Pursa Ltd. V. Commissioner of Income-tax (1), the Supreme
Court held that where in a case the sale of machinery and
plant was a step in the process of winding up of its
business, the intention of the company having been to
discontinue the business, such sale was not an operation in
furtherance of the business carried on by the company, but
was only a realisation of its assets in the process of
gradual winding up of its business which eventually
terminated in the voluntary liquidation of the company, and
provision of section 10(2)(vii) would not apply. In the
present case, the formation of the new company was to take
over the business of the old company. The lease of the
machinery, the transfer of the right to carry on the
business of publishing newspapers, and the ultimate sale of
the machinery were part of the same scheme for winding up
the Free Press Company. The sale of machinery was
undoubtedly a closing down sale and the profit earned
therein could not come in for assessment under section
10(2)(vii)."
These two cases deal with the second proviso to s.
10(2Xvii). Clause (vii) deals with loss and the second
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proviso, with profits; but the proviso is not an exact
counterpart of the clause. The proviso enacts a fiction
which the main clause does not enact. The reason for the
introduction of the fiction in the proviso appears to be
this: Loss in business may take place in various ways. If
the business requires more to run it than it produces, there
is loss. Loss in
(1) [1954] S.C.R. 767.
238
business may also take place if the equipment with which
business is done is lost, destroyed, or depreciates or
suffers in value. The law takes note of the loss, and,
provided it has been computed and brought into the books of
the business and written off, it can be claimed as a
deduction. Profit in business, on the other hand,
primarily, means profit earned in the business. But if an
allowance had been claimed as depreciation and had been
allowed, and if the sale of the building, machinery or plant
on which depreciation allowance was claimed in the past,
shows that there was, in fact, no depreciation but an
accretion in value, the law deems that a profit has been
made. The fiction thus converts that which may not be
strictly profit of the business in a narrow sense, into a
profit for purposes of assessment. Formerly, it was a
matter of doubt whether even this accretion could be deemed
a profit when the business had closed down; but now, the
legislature has amended the law by saying that this
fictional profit must be brought to tax irrespective of the
fact that the sale took place " during the continuance of
the business or after the cessation thereof" But it is to be
noticed that no such amendment was made in cl. (vii) to
exclude loss over buildings, machinery or plant after the
clospre of the business. It is thus clear that the
principles which govern the proviso cannot be used to govern
the main clause, because profit or loss arise in different
ways in business. The two rulings do not, therefore, apply
to the facts here.
We must thus restrict ourselves to the scheme of the Indian
Income-tax Act and the clause in question. The scheme of
the Income-tax Act, as was pointed out by Lord Porter in
Indian Iron & Steel Co. Ltd. v. Commissioner of Income-tax,
Bengal (1), is that income. tax is assessed and paid in the
next succeeding year upon the results of the year before.
It is the income of the previous year which is brought to
tax in the succeeding year, which is called the year of
assessment. For the purpose of assessment, the Indian
Income Tax Act divides the sources of income, profits
(1) [1943] 11 I.T.R. 328, 336.
239
and gains into six heads in s. 6. The fourth head is "
Profits and gains of business, profession or vocation ".
Sections 7, 8, 9, 10, 12, 12A and 12B lay down’ the rules of
computation under the different heads. Profits and gains of
business are dealt with in s. 10. The first subjection of
that section provides:
" The tax shall be payable by an assessee under,, the head I
Profits and gains of business....’ in respect of the profit
or gains of any business...... carried on by him."
In Commissioner of Income-tax v. Shaw Wallace & Co., Ltd.
(1), it was pointed out by the Judicial Committee that the
words " carried on by him " were " an essential constituent
of that which is to produce the taxable income; it is to be
the profit earned by a process of production ". It was
further pointed out that " business " had been defined in
the Income-tax Act to " include any trade, commerce or
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manufacture, or any adventure or concern in the nature of
trade, commerce or manufacture ", and that it involved " a
fundamental idea of the continuous exercise of an activity."
It was, however, pointed out that the source was not
necessarily one which was expected to be continuously
productive, but one whose object was the production of a
definite return, excluding anything in the nature of a mere
windfall, and that ’capital’ in most cases was hardly more
than an element in the process of production.
We agree with this analysis of the Income-tax Act, and
indeed, these observations were also applied in the Pursa
Limited case (2), to which we have already referred. It
thus follows that capital may, in the process of production,
depreciate, get used up or lost. The Income-tax Act, while
taxing income, profits or gains, takes note of, and makes
allowance for such eventualities.
If the profits or gains of a business for a particular year
are to be taxed, they must be computed for the whole year
taking into account losses incurred during the same year.
Now, the first condition precedent appears to be that the
business must have been
(1) (1932) L.R. 59 I.A. 206.
(2) [1954] S.C.R. 767.
240
" carried on by the assessee ". This is to be found in the
first sub-section of s. 10. The second condition is that
the building, machinery or plant must have been " used for
the purposes of the business ". This is to be found in of.
(iv) of the second sub-section of s. 10. The third
condition is that the sale etc., should have taken place
during the year of account. This follows from the nature of
the tax which is assessed and levied on the profits of the
working of the previous year. The fourth condition is that
the loss should have been brought into the books of the
assessee and written off. This is provided by the first
proviso. There is no other condition to be found expressly
in the section or in the Act. It is nowhere stated that the
business of the assessee should have been carried on for the
whole year, or that the machinery or plant should have been
used for the whole of the accounting period. There are no
words which would show that, if the assessee works only for
a part of the year and then sells out, the loss that he
incurs is not a business loss, or that he must pay tax on
the small profit that he might have made, and bear the lose
in addition. We have shown above that the case of profit
referred to in the second proviso stands on a different
footing altogether, since profit and loss arise in different
ways. The law has thus treated the two subjects
differently, and the legislature has amended the proviso but
not the clause.
In view of what we have said above, we are of opinion that
the judgment of the High Court was correct in all the
circumstances of this case, and this appeal must be
dismissed with costs.
Appeal dismissed.
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