1. By this reference under section 66(1) of the Indian Income-tax Act, 1922, the question that is referred to us for determination is :
'Whether, on the facts and in the circumstances of the case, the ship, ss. Bharatsena, can be said to have been used by the assessee for the purpose of its business at any time during the previous year 1956 ?'
The question for determination relates to the assessment year 1957-58, the previous year of which was the calendar year ending December 31, 1956.
2. The assessee is a company, registered under the Indian Companies Act, carrying on the business of running a fleet of cargo steamers, mostly on Indian waters. on July 1, 1947, the assessee purchased for the purpose of its business the steamers, ss. Bharatsena, for the sum of Rs. 14,45,288. Certain additions at the cost of Rs. 5,90,901 were made to the steamers and depreciation was allowed by the Income-tax Officer to the assessee on the footing that the total cost of the steamer was Rs. 20,36,189.
3. In or about October, 1955, the assessee commenced negotiations for sale of the above steamer through its agents in London, M/s. Harley Mullion & Co. Ltd., London. These negotiations resulted into acceptance of offer on December 2, 1955, by the agent of the buyer, a company floated in Panama. The acceptance of the buyer was communicated to the assessee by a cable and letter dated December 2, 1955, by the assessee's agents, M/s. Harley Mullion & Co. Ltd., London. Thereafter other formalities regarding Government permission, mode of remittance of sale proceeds from purchaser with the approval of the Reserve Bank of Indian, etc., were carried out. On December 28, 1955, the ship sale contract was reduced to writing in accordance with the terms agreed during the course of negotiations. The contract, inter alia, provides that the vessel is sold on outright basis and is to be delivered to the purchaser safely afloat with her present class maintained free of all recommendations and free of average at an Indian port in vendors' option. The purchase price was agreed at Pound 1,53,000 sterling payable in U.S. Dollars; 10 p c. of the price was payable as deposit on signing of the agreement and the balances of the purchase price was to be paid in a bank in London in U.S. Dollars credited in Hard Currency Sterling Account. Delivery of the vessel was to be given within January/February, 1956. Clause 4 of this contract contained certain provision as regards the repairs to be carried out. Under this clause, the assessee as vendor was to place the vessel in dry dock and if rudder, propeller, bottom or other underwater part or parts were found broken, damaged or defective so as to affect the vessel's clean certificates of class, the same shall be made good at the vendor's expenses to the classification society's satisfaction to retain vessel's class without qualification. There was also provision in this clause about certain repairs to be carried out if they were required by the purchasers and the costs thereof were to be borne by the purchasers. Under this agreement, the assessee as the vendor was to pay all the costs of transporting the vessel to the dry dock and from the dry dock to the place of delivery. Clause 4(b) provided for the time of delivery. under the clause, the vessel shall deemed ready for delivery after coming out of the dry dock on completion of any repairs that may be necessary for which the vendor shall give final notice of readiness to the purchasers and the purchasers were to pay for the vessel within 3 days from such time of readiness as provided in clause 5 of the contract. Clause 7 of the contract provided for the consequences of default of due payment by the purchasers. Under that clause failing due payment by the purchasers of any part of the purchase money, the deposit in respect of the vessel was liable to be forfeited to the sole use of the vendors were at liberty to resell the vessel either by public or private sale and any deficiency between the amount realised and the amount due was to be made goods by the defaulting purchasers together with interest at the rate of 5% p.a. and all expenses of such resale. Clause 8 of this contract provided for consequences of default on the part of the vendors. Under that clause if the vendor committed default in the execution of the legal bill of sale or in the delivery of the vessel as provided therein, other than from any cause whatsoever beyond the vendor's control, the deposit was to be released to the purchasers on demand together with interest at the rate of 5% p.a. without prejudice to the purchaser's claim for proved damage. Clause 15 of the agreement provided that the agreement was subject to the vendor's securing the sanction of the Indian authorities to the sale of the steamer to the purchasers for registration under Panamanian Registry. This clause further provided that, in the event of such sanction not being obtained, the contract was to become null and void and, in that event, the deposit paid by the purchasers was to be refunded to him.
4. When negotiations resulted in an oral agreement on December 2, 1955, the ship was actually being used by the assessee for the purposes of its business and was on its way to Rangoon with cargo. By the cable dated December 12, 1955, Rangoon agents of the assessee enquired whether the ship, Bharatsena, can load Madras. A reply to this cable was sent by the assessee-company by its cable dated December 13, 1955, whereby the Rangoon agents were informed that the ship, Bharatsena, cannot load Madras. On December 12, 1955, a letter was written by the assessee to the Rangoon agents in forming them that the ship, Bharatsena, had been agreed to be sold and its delivery to the purchaser was to be given latest by the end of February, 1956, at an Indian port. Rangoon agents were requested that when the ship arrived at Rangoon, they should arrange to discharge the cargo as quickly as possible and sail it for Calcutta without loading any cargo. Rangoon agents were expressly told not to book any cargo as it was required urgently in Calcutta. This letter was replied to by the Rangoon agents by the letter dated December 16, 1955. Rangoon agents therein stated that the ship was expected to arrive in a day or two and it would be immediately sailed to Calcutta as soon as the cargo was discharged and that would be done without loading any cargo. Later on instructions were issued on December 18, 1955, to supply the ship only enough fuel oil so as to reach it to Calcutta. This ship actually sailed in ballast from Rangoon to Calcutta on December 29, 1955, and reached there on January 4, 1956. It is common ground that between January 4, 1956, and June 15, 1956, repairs were being carried out to it at Calcutta in the dry dock. The ship was ready for delivery in accordance with the terms of the contract of sale by June, 1956, and it was actually delivered on June 23, 1956.
5. Before the Income-tax Officer, it was urged on behalf of the assessee that the ship ceased to be used for the purpose of the assessee's business when it left in ballast the Rangoon port on December 29, 1955, for the purpose of repairs in the dry dock at Calcutta. It was urged on its behalf that no freight was accepted from December 29, 1955 and, no freight was received till the date of delivery. It was urged that, while the repairs were being carried out in the year 1956, that was with a view to fulfill and carry out the terms of the contract of sale dated December 28, 1955. In short, the submission was that at no time during the relevant accounting period was the ship put to any use for the purpose of business. The Income-tax Officer rejected these contentions and held that the assessee must be considered to have used the steamer up to June 23, 1956, when the sale was completed by actually giving the steamer to the buyers. According to him, the steamer's undergoing repairs amounted to passive user of the steamer as earlier depreciation used to be allowed on steamers for the period during which they were undergoing repairs. Without prejudice to these findings, he further held that, in any event, the steamer was used by the assessee for its business up to January 9, 1956, on which date the memorandum of agreement was signed on behalf of the assessee or till January 4, 1956, when the steamer returned from its foreign voyage to an Indian port. According to the Income-tax Officer, the steamer was used for its business for a part of the accounting year and that the provisions of section 10(2)(vii) were applicable to the assessee's case. Profit on sale of the steamer was computed at Rs. 19,00,650 and was accordingly taxed. In appeal the Appellate Assistant Commissioner took the view that the ship was not used by the assessee for its business purpose after December 29, 1955, and that no profit arose under section 10(2)(vii) for the assessment year 1957-58.
6. In the appeal by the revenue before the Income-tax Tribunal, the contention was advanced in a threefold manner. Firstly, it was contended that India was the home country of the ship; that it was sailing under the Indian flag, that it was to be delivered at the Indian port by the terms of the contract; that though it might have left Rangoon in ballast on December 29, 1955, it actually reached Calcutta, the port of delivery, only in the year 1956. It was also urged that the ship may have to sail in ballast actually even when it was being used for lifting the cargo and earning freight; that depended upon the availability of cargo and the place where it was available. The submission was that not much importance should be attached to the fact that the ship sailed in ballast from Rangoon. The submission was that the ship could be said to have been used for the purpose of business at least up to January 4, 1956, when it reached the dry dock at Calcutta. Alternatively, it was urged that even during the period January 4, 1956, to June 15, 1956, the ship was used for the purpose of the assessee's business as repairs were being carried out to it. Lastly, it was submitted that the ship was actually ready for delivery on June 15, 1956, but it was actually delivered on June 23, 1956. The submission, therefore, was that during this period, it was in a condition of being used as the ship and was capable of being put to that use. It was urged that at least during this period, there was a passive user of the ship. The Tribunal considered that the relevant question was whether the ship was used for the purpose of the assessee's business during the part of the accounting year 1956. On that question, it gave a finding that if a ship is under repairs -repairs occasioned by the use for which it is required and also the repairs required to be carried out to enable it to retain its class to which it belongs while the assessee used it for the purpose of its business - is a ship so used while it is under such repairs. In view of this finding, the Tribunal allowed the appeal of the revenue.
7. On behalf of the assessee Mr. Kolah urged that it is not the case of the assessee that during the accounting period, it did not carry on its business. The submission, however, was that the question to be considered is whether during the relevant accounting period, the ship, Bharatsena, was being used, even either mordantly or passively for the purpose of its business. It was urged that latest at least by December 28, 1955, a concluded contract was entered into by the assessee whereunder it agreed to sell the ship to a foreign company; that it gave express and specific instructions to the agents at Rangoon that it should not loan any cargo and it should be sent simply in ballast to Calcutta for the purpose of repairs that were to be carried out under the contract; that at least from December 28, 1955, it was quite clear that the ship, Bharatsena, was not being used by the assessee for the purpose of its business at any time until delivery thereof, when it was handed over to the purchaser on June 23, 1956. On the other hand, on behalf of the revenue, Mr. Joshi urged the same contentions as were urged before the Tribunal. Firstly, he submitted that at least up to January 4, 1956, when the ship reached Calcutta in ballast, it was being used by the assessee for the purpose of its business, as under the terms of the contract, delivery thereof was to be given at an Indian port. He also submitted that under the terms of the contract, it was obligatory upon the assessee to carry out such repairs to the ship as to retain the class to which it belonged; that while such repairs were being carried out, the ship was in any event passively used by the assessee for its business. Lastly, the submission was that the repairs were completed on June 15, 1956, while delivery was actually given to the purchasers on June 23, 1956. At any time during this period, it was open to the assessee to use this ship for the purpose of business and it was at least available for passive user.
8. Under section 10 of the Income-tax Act, 'the tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him.' Under sub-section (2) such profits or gains are to be computed after making the allowances therein specified. We are concerned with the allowance to be computed under clause (vii) of sub-section (2) and it is as under :
'(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.'
We are concerned with the second proviso of this clause and it is as under :
'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 cost and the written down value shall be deemed to be profits of the previous year in which the sale took place.'
There are other provisos to this clauses, but they are not relevant for the present purpose. The use of the word 'such' both in clause (vii) as well as the proviso above referred to mean 'building, machinery or plant...... used for the purpose of the business, profession or vocation' as stated in clause (iv).
9. There is no controversy in the present case as regards the conditions which are essential to be fulfilled before the excess amount can be brought to tax. These essential conditions are lad down by the Supreme Court in the case of Commissioner of Income-tax v. Moon Mills Ltd. This case relates to the excess amount of insurance money received by the assessee. It is held that before the excess insurance money received over the difference between the written down value and scrap value of the machinery is brought to charge under the fourth proviso to sectioned 10(2)(vii) of the Indian Income-tax Act, 1922, it is essential that, (i) during the previous year in which moneys are received the business shall have been carried on by the assessee for the part or whole of it; and (ii) that machinery shall have been used in the business in the previous year. There is no controversy in the present case that the assessee-company carried on business during the previous year, but the question, however, arises whether the ship, Bharatsena, has been used in the business at any time in the previous year.
10. Strong reliance was placed on behalf of the assessee upon the decision of the Supreme Court in the case of Liquidators of Pursa Ltd. v. Commissioner of Income-tax. The Supreme Court took the view that the words 'used for the purpose of the business' in section 10(2)(iv) of the Indian Income-tax Act, 1922, 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). It was further held that in order to attract the operation of clauses (v), (vi) and (vii) of section 10(2) 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 of them and the second proviso to that clause also does not come into operation. In that case, the assessee-company was carrying on the business of growing sugarcane and manufacturing and selling sugar. It commenced to negotiate in 1943 for the sale of the factory and other assets with the ultimate object of winding up the company, received a firm offer on 9th August, 1943, and concluded the agreement for sale on 7th December, 1943. The memorandum of agreement provided that the vendor was to sell and demise to the purchaser for a certain sum all the lands, buildings, machinery and plant as on 9th August, 1943, but the stocks of manufactured sugar on that date were expressly excluded from the agreement. On the 7th December, 1943, the consideration was paid to the company and three days later the purchaser was given possession of the factory. The company continued to sell the sugar stocks valued at Rs. 6 lakhs up to June, 1944, and it went into voluntary liquidation on June, 1945. Between 9th August, 1943, and 10th December, 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. In the assessment of the company to income-tax for the accounting period from 1st October, 1943, to 30th September, 1944, the income-tax authorities treated the surplus made by the company on the sale of the buildings, plant and machinery as profits under proviso (2) to section 10(2)(vii). The Appellate Tribunal found that the assessee-company was carrying on a business and treated the surplus as taxable profits. On a reference under section 66(1) the High Court by majority upheld the decision of the Tribunal. On appeal the Supreme Court took the view that the decision of the Tribunal was vitiated by its failure to keep in view the true meaning and scope of section 10(2)(vii) and could not, therefore, be supported. 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 in the accounting year at all and in any event not having any connection with the carrying on of that limited business during the accounting year, section 10(2)(vi) could have no application to the sale of any such machinery or plant. Consequently, the surplus arising on the sale of the machinery and plant was not chargeable under section 10(2)(vii).
11. The principle laid down in the case of Liquidators of Pursa Ltd. v. Commissioner of Income-tax was followed by this court in Whittle Anderson Ltd. v. Commissioner of Income-tax, but on the facts it was held that it was not attracted. This court took the view that such building, machinery or plant in clause (vii) means 'building, machinery or plant used for the purposes of the business, profession or vocation' and, even for the applicability of the second proviso to clause (vii) of section 10(2) the machinery in the instant case must be shown to have been used by the assessee in the business which it was carrying on in the previous year. This High Court further took the view that the word 'used' in that section should be understood in a wide sense so as to embrace passive as well as active user; when machinery is kept ready for use at any moment in a particular factory under an express agreement from which taxable profits are earned, the machinery can be said to be 'used' for the purpose of the business which earned the profits although it was not actually worked. Having regard to the facts of the case. reliance was placed upon the terms of the agreement that was considered by the court. In that case. the agreement clearly provided that, although two out of the four presses which were directly in pooling arrangement were to remain idle while the two presses worked, the owners of these presses which were idle had to keep them ready for use at any time and the contingency for their use could also, upon the terms of the agreement, arise at any time and having regard to the above meaning of the word 'used', it is clear that even these presses which remained under forced idleness were in the during the entire period of the year.
12. Question to be considered is whether the ship, Bharatsena, was during the relevant accounting year 1956 put to any passive or active user. There is no controversy whatever that during the year 1956 at no time it was put to active user. Whether it was put to passive user in a question that remains for determination. It is clear from the facts stated in the statement of case that an oral contract to sell the ship, Bharatsena, came into existence when the acceptance of the buyer was communicated to the assessee by cable and letter, dated December 2, 1955, by the assessee's agents, M/s. Harley Mullion & Co. Ltd., London. Actually, the ship sale contract was reduced to writing on December 28, 1955. Relying upon certain observations made by the Income-tax Officer, it was sought to be urged by the revenue that the contract was signed on behalf of the assessee on January 9, 1956. Such a contention is not permissible to take in view of the clear statement in the statement of the case. In paragraph 3 thereof it is stated that on December 28, 1955, the ship sale contract was reduced to writing in accordance with the terms agreed during the course of negotiations. After an oral contract to sell the ship was arrived at, all subsequent communications clearly go to show that prior to December 31, 1955, the assessee-company decided not to use the ship, Bharatsena, for the purposes of its business. By the letter dated December 12, 1955, the assessee-company intimated to the Rangoon agents that when the ship arrived at Rangoon, it should be made to discharge its cargo as quickly as possible and thereafter it should sail for Calcutta without loading any cargo. It was clearly stated 'Please do not book any freight for her as we require the steamer urgently in Calcutta.' That letter was replied to by the Rangoon agents on December 16, 1955. In this letter, the Rangoon agents stated that they expected the ship to arrive in a day or two and shall sail it immediately to Calcutta no sooner the discharge of cargo was completed and without loading any cargo. Later on, by a cable dated December 26, 1955, the assessee-company informed the Rangoon agents to supply enough fuel oil to Bharatsena so that it may reach Calcutta. There is no controversy that in view of these specific and express instructions on December 29, 1955, the Bharatsena had actually sailed in ballast from Rangoon to Calcutta and reached there on January 4, 1956. It was urged on behalf of the revenue that as, under the terms of the contract, the delivery was to be given at Indian port, at least up to January 4, 1956, the ship should be regarded as having been used for the purpose of business because it was on that day that it reached to dry dock at Calcutta. If prior to the commencement of the accounting year the assessee-company decided not to use the ship Bharatsena for the purpose of business then the mere fact that for the purpose of carrying out such obligation under the contract, it had to reach a port in India, it cannot be said that until it reached the port of Calcutta the assessee used the ship for the purpose of its business. Repairs to the ship because necessary by reason of the contractual obligations under the contract. Under the terms of the contract, certain repairs had to be carried out to the ship in order that it may retain the same class to which it belonged. Such repairs were not required to make the ship useful for the purpose of business of the assessee-company. They had to be carried out because it was one of the terms and conditions under the ship sale contract. While the ship was under repairs up to June 15, 1956, it cannot be regarded as being passively used by the assessee-company for the purpose of its business. After the ship sale contract was entered into a clear decision was taken that it should not be used for business and at no time during the accounting period was it even passively used for the purpose of the business. It was pointed out that in case the purchaser committed default in carrying out its obligations under the contract, the repairs so carried out may be useful to the assessee-company while the ship was being used by its business. There is no evidence whatever in the present case to indicate that if in case the purchaser committed default in carrying out his obligations under the contract, the assessee would have used the ship for its business. It may well enter into another contract for its sale. Even during the period between June 15, 1956, and June 23, 1956, when actually delivery was given, it cannot be regarded that the ship was used passively for the purpose of its business.
13. Under the circumstances, our answer to the question referred is in the negative. The revenue shall pay the costs of the assessee.
14. Question answered in the negative.