Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, KERALA
Vs.
RESPONDENT:
K. B. KALIKUTTY AND ANR.
DATE OF JUDGMENT:
02/08/1968
BENCH:
GROVER, A.N.
BENCH:
GROVER, A.N.
SHAH, J.C.
RAMASWAMI, V.
CITATION:
1969 AIR 869 1969 SCR (1) 531
ACT:
Income Tax Act, 1922, s. 10(2)(vii), second proviso-as
amended by Act 67 of 1949--Scope of.
HEADNOTE:
The assessee was running a business of plying buses and
during its previous year ending on August 16, 1959, the
buses had been plied for part of the year but were sold
thereafter. The Income-tax Officer assessed the difference
between the sale price of the buses and their written down
value to tax as profit under the second proviso to s.
10(2) (vii). In appeal, the Appellate Assistant
Commissioner rejected the assessee’s contention that the
business had been transferred as a whole and therefore the
profit in question could not be taxed. The Tribunal also
dismissed an appeal taking the view that the buses had been
plied by the assessee for part of the previous yea.r and the
profit on the sale of these buses was taxable under the said
provision. However, the High Court, upon a reference,
held that the amount in question was not assessable as
profit under s. 10(2)(vii) on the assumption that the whole
of the bus service business had been wound up during the
relevant period.
On appeal to this Court.
HELD: allowing the appeal:
Even on the assumption that the sale of the buses was a
closing down or a realization sale it would nonetheless be
taxable since the sale was made after the amendment of the
second proviso. to. s. 10(2)(vii) by Act 67 of 1949. [533 F-
G]
According to the law laid down by this Court the view of
the High Court would have been sustainable if the sale in
the present case had been effected during the assessment
year prior to the amendment of the proviso by Act 67 of
1949. The critical words which were inserted by that
proviso namely, "whether during the continuance of the
business or after the cessation thereof", must be given
their proper meaning. It is quite plain that if the
building, machinery or plant is sold during the continuance
of the business or after the business ceases, the sale
proceeds would be liable to tax in accordance with the
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proviso. When the legislature clearly provided that the
proviso would apply even if the sale was made, after the
cessation of the business, it is difficult to conceive that
it was intended to exclude from the ambit of the proviso a
sale made for the purpose of closing down the business or
effecting its cessation. [535 F-H]
Commissioner of Income-tax, Madras Iv. Express
Newspapers Ltd., Madras, [1964] 8 S.C.R. 189, 195;
Commissioner of Income-tax, Kerala v. West Coast Chemicals
and Industries Ltd. 46. I.T.R. 135; Commissioner of Income-
tax, Kerala v.R.R. Ramakrishna Pillai, 66 I.T.R. 725 and
The Liquidators of Pursa Limited v. Commissioner of Income-
tax, Bihar, [1954], S.C.R. 767; distinguished.
Commissioner of Income-tax v. Ajax Products Ltd., [1965]
1 S.C,R. 700; referred
LI 3Sup. CI/68--3
532
JUDGMENT:
CIVIL AppELLATE JURISDICTION: Civil Appeal No. 714 of 1966.
Appeal by special leave from the judgment and order,
dated September 17, 1964 of the Kerala High Court in Income-
tax Referred Case No. 62 of 1963.
R.N. Sachthey, T.A. Ramachandran and B.D. Sharma, for
the appellant.
C.S. Venkateswara lyer, Sardar Bahadur Saharya and
Yougindra Khusalani, for respondent No. 2.
The Judgment of the Court was delivered by
Grover, J. The sole question for determination in this
appeal by special leave is whether on a true interpretation
and construction of the second proviso to s. 10(2)(vii) of
the Income Tax Act 1922, sale of the assets of an assessee
effected for the purpose of closing down the business would
be covered by that proviso and would be assessable as
profit.
The assessee was running the business of plying buses in
the name of Kumar Motor Service. During the assessee’s
previous year which was the year ending August 16, 1959 the
buses had been plied for part of the year but they were sold
between August 16, 1958 and January 13, 1959. Two of the
buses had been sold for Rs. 78,000 and the other four for
Rs. 35,000, the total consideration received being Rs.
1,13,000. The assessee claimed a payment of Rs. 2,000 as
brokerage. The Income-tax Officer fixed a sum of Rs. 25,000
as the route value and held this amount to be a capital gain
assessable to tax. On the balance of Rs. 86,000 he worked
out the profits in the following manner :-
Sale price of 6 buses: .. Rs. 86,000 Written down
value of six
Rs. 36,712
buses . .
Rs. 49,288
The Income Tax Officer consequently assessed the sum of
Rs. 49,288 as profit under the second proviso to. s.
10(2)(vii). Before the Appellate Assistant Commissioner in
appeal the assessee contended that the business had been
transferred as a whole and therefore no profit could be
taxed under the aforesaid provision. This contention was
rejected by the Appellate Assistant Commissioner on the
ground that the transaction was only of sale of buses, along
with the route value and this constituted sale of major
assets but the business as such was not transferred or
handed over to any party. Before the Income Tax Appellate
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533
Tribunal the determination of Rs. 86,000 as the value of
six buses was not disputed and the only point agitated
related to the assessability of the amount of Rs. 49,288 as
business profit under’ the second proviso. The tribunal was
of the opinion that the buses had been plied by the
assessee for part of the previous year and the profit on the
sale of these buses was taxable under the said provision.
The tribunal in its appellate order noticed the decision of
this Court in Commissioner of Income Tax, Madras v. Express
Newspapers Ltd., Madras(x) in which the question arose
whether the second proviso would apply where the sale had
been made in the process of winding up of a company but
distinguished it on the ground that this Court in that case
considered the second proviso as it stood before the
amendment made by s. 11 of the Taxation Laws (Extension to
Merged States and Amendment) Act, 1949 (67 of 1949). The
decision of this Court in Commissioner of Income Tax, Kerala
v. West Coast Chemicals and Industries Ltd.(2) was also
held by the tribunal to be inapplicable to the facts .of the
present case.
The assessee moved the tribunal for making a reference
to. the High Court and the following question was referred:
"Whether on the facts and in the
circumstances of the case, the sum of Rs.
49,288 was assessable as profit under the
provisions of section 10(2)(vii) ?".
Although the tribunal had given no finding that the whole of
the. bus service business had been wound up during the
relevant period, the High Court proceeded to answer the
question on that assumption. It is difficult to see how the
High Court was justified in saying that the tribunal had
apparently accepted the contention that the sale was a
closing down or a realization sale. In such a situation we
might have followed the course which commended itself in
Commissioner of Income Tax, Kerala v.R.R. Ramakrishna
Pillai(3); but we are of the opinion that even on the
assumption that the sale of the buses was a closing down or
a realization sale it would. nonetheless be taxable since
the sale was made after the amendment of the second proviso
by Act 67 of 1949. The High Court in the present case
referred to the observations in the Commissioner of Income
Tax v. Express Newspapers Ltd., Madras(1) and to the three
conditions laid down therein for bringing the sale
proceeds to charge under the second proviso. The High Court
thought that the third condition was not satisfied as the
sale of the buses was a closing down or a realization sale
which was a mere incident of the winding up process of the
business. It was consequently held that the question:
(1) [19641 8 S.C.R. 189, 195. (2) 46 I.T.R. 135.
(3) 66 I.T.R. 725.
534
referred must be answered in favour of the assessee and
against the Revenue.
Now the second proviso was in the following terms:
"s. 10 ..............................
(2)..................................
Proviso (1) ...........................
(2) Provided further that where the
amount for which any such 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
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cost and the written down value shall be
deemed to be profits of the previous year in
which the sale took place;"
The words within brackets did not exist before the amendment
made by Act 67 of 1949 and were inserted by that Act. In The
Liquidators of Pursa Limited v. Commissioner of Income Tax,
Bihar(1) the controversy arose out of the proceedings
relating to the assessment of Pursa Limited for the
assessment year 1945-46. Attempts had been made from 1942
onwards to sell the entire business of the company but
without success. In December 1943 an agreement was executed
whereby the assessee agreed to sell all the lands,
buildings, machinery, plant etc., used in connection with
the sugar factory which was being run by the company. On the
date of the sale the company possessed sugar stocks valued
at Rs. 6 lakhs which the company continued to sell up to
June 1944. The company went into voluntary liquidation on
June 20, 1945. The Income Tax Officer held that the profits
of the sale of machinery and plant were liable to assessment
under s. 10(2)(vii). The Appellate Asstt. Commissioner and
the Income Tax Appellate Tribunal affirmed that order.
After the matter had been taken to the High Court it came
finally in appeal to this Court. It was held 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 the business culminating in
the voluntary liquidation of the company and even if the
sale of the stock of sugar be regarded as carrying on of
business of the company and not a realisation of its assets
with a view to winding the machinery or plant not having
been used at all, s. 10(2) (vii) would have no application
to the sale of any such machinery or plant. The controversy
in Commissioner of Income Tax, Kerala v. West Coast
Chemicals and Industries Ltd.(2) arose out of the assessment
of the company for the accounting year ending April 30,
1944. The assessee company had entered into an agreement
(1) [1954] S.C.R. 767. (2) 46 I.T,R. 135
535
in 1943 for the sale of the lands, buildings, plant and
machinery of a match factory with a view to close down the
business. The purchaser made default in payment and a few
months later a fresh agreement was entered into between the
parties for the sale of the property mentioned in the first
agreement and also chemicals and paper used for manufacture
which had not been included in the first agreement. The
Department sought to assess the profits derived from the
sale of the chemicals and paper as profits from the
business. The assessee contended that it was a realisation
sale and this amount was not liable to tax. It was held
that on the facts of that sale the sale of chemicals and
materials used in the manufacture of matches was only a
winding up. sale to close down the business and to realise
all the assets. Therefore the tax liability was not
attracted. In Commissioner of Income Tax, Madras v. Express
Newspapers Ltd., Madras(1) a decision on which the High
Court relied a great deal in the present case the question
again arose out of the assessment made before the amendment
made in 1949, the accounting year being 1946-47. Reference
was made by Subba Rao, J., (as he then was) delivering the
judgment of this Court to the decision in the case of The
Liquidators of Pursa Limited(2) as also to other decisions
and after an examination of the relevant provisions the
following three conditions were laid down for bringing the
sale proceeds to charge under the second proviso to s.
10(2)(vii):
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"( 1 ) During the entire previous year
or a part of it the business shall have been
carried on by the assessee;
(2) the machinery shall have been used
in the business; and
(3) the machinery shall have been sold
when the business was being carried on and not
for the purpose of
closing it down or winding it up."
There can be no doubt that according to the law laid down
by this Court the view of the High Court would have been
sustainable if the sale in the present case had been
effected during the assessment year prior to the amendment
of the proviso by Act 67 of 1949. The critical words which
were inserted by that proviso namely, "whether during the
continuance of the business or after the cessation thereof’,
must be given their’proper meaning. It is quite plain that
if the building, machinery or plant is sold during the
continuance of the business or after the business ceases the
sale proceeds would be liable to tax in accordance with that
proviso. The only question therefore is whether when a sale
is made for the purpose of closing down the business or
effecting its cessation the proviso would be inapplicable.
When the legislature clearly provided that the proviso would
apply even if the sale
(1) 1954 8 S.C.R 189.
(2) [1954] S.C.R. 767
536
was made after the cessation of the business it is difficult
to conceive that it was intended to exclude from the ambit
of the proviso realisation sales of the nature contemplated
in the previous decisions of this Court. Such a result
would be illogical. Even logic is not necessarily to govern
the interpretation of a taxing provision, the rule of
reasonable interpretation cannot be ignored. Indeed this
Court in a recent judgment Commissioner of Income Tax v.
Ajax Products Ltd.(1) clarified the position about the
effect of the amendment made in 1949 in the proviso and
reference was made to the three conditions for the
applicability of the second proviso before the amendment
which were laid down in the previous decision of this Court.
It was then observed:
"the words whether during the continuance
of the business or after the cessation thereof
were not present in the unamended proviso. In
the two decisions cited earlier, in the
absence of such words, this Court held that to
attract the said proviso the machinery shall
have been sold before the business was closed
down. This clause omits that condition for
the exigibility of the tax".
The above observations clearly show that the amending words
in the proviso eliminated the third condition which had been
laid down for its applicability in the previous decision
namely, that the machinery shall have been sold when the
business was being carried on and not for the purpose of
closing it down or winding it up. Once that condition
disappears as a result of the amendment only the first two
conditions remain and all that has to be seen is whether
during the entire previous year or a part of it the business
has been carried on by the assessee and that the machinery
has been used in the business. Both these conditions,
according to the finding given by the tribunal, exist in the
present case. The result would be that the profits. arising
out of the sale of buses in question as determined by the
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Income Tax Officer would be chargeable to tax in accordance
with the second proviso to s. 10(2) (vii).
The answer to the question referred in the present case
has to be in the affirmative and against the assessee. The
appeal is consequently allowed with costs and the answer
returned by the High Court is discharged.
We are informed at the Bar that K.B. Kalikutty one of
the legal representatives of the assessee’had died before
Special Leave was granted. It will be open to the Tribunal
to decide the effect of death of the said legal
representative and to non-impleadment of the legal
representatives of the deceased at the hearing under
section 66(5) of the Act.
R.K.P.S.
Appeal allowed.
(1) [1965] 1 S.C.R. 700.
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