1. Originally, at the instance of the revenue, two questions were asked to be referred, arising out of the assessment proceedings in respect of the assessee for the accounting year 1959. These questions were :
'(1) Whether, on the facts and in the circumstances of the case, the profit of Rs. 29,364 realised on the sale of machinery during the year of account is liable to tax under s. 10(2A) or under the second proviso to s. 10(2)(vii) of the Indian I.T. Act, 1922
(2) Whether there was evidence before the Tribunal for its finding that the machinery in question was not used for the purpose of his business in the year of sale, that is, 1959 ?'
2. The Tribunal declined to refer the second question but referred the first question under s. 66 of the Indian I.T. Act, 1922. However, by a supplemental statement of case dated 19th July, 1977, the second question also has now been referred to this court. Both the questions will, therefore, have to be answered. These questions arise on the following facts :
3. Admittedly, in the calendar year 1959, the assessee sold certain machinery and the total surplus amount recovered by the sale of the said machinery was Rs. 72,452. This was in two parts. One part of the amount was Rs. 43,088 and the other was Rs. 29,364. There is no dispute with regard to the incalculability of Rs. 43,088 and the facts in relation thereto need not, therefore, be stated. The other amount of Rs. 29,364 represented surplus on the sale of machinery which was, according to the assessee, discarded in the year 1958 or, in any case, in the year earlier than the calendar year 1959. This amount was, therefore, according to the not taxable under the second proviso to s. 10(2)(vii). Admittedly, the assessee had claimed depreciation on the written down value of the said discarded machinery in the year 1958, the value of the machinery having been shown at Rs. 33,655. This depreciation was allowed by the ITO. The ITO, however, chose to tax the amount of Rs. 29,364 as being covered by the provisions of s. 10(2A) of the Indian I.T. Act, 1922. In appeal, the AAC took the view that, 'It is admitted by the ITO that the assets were not used in the accounting year and were discarded in the earlier years' and, therefore, the provisions of s. 10(2)(vii) were not attracted. He further took the view that the said profit did not fall within the ambit of s. 10(2A). The department took an appeal before the Tribunal. The Tribunal confirmed the view of the AAC that the profit was not covered by s. 10(2A). With regard to the contention of the department that the profit was taxable under s. 10(2)(vii) the Tribunal took the view that it was not necessary to remand the matter to the AAC for a fresh finding on the question whether the machinery was discarded in the year 1958, and the Tribunal took the view that it must proceed on the footing that because the machinery was discarded prior to the year 1959, it could not be said to have been used for the purpose of carrying on the business in the year 1959, that is, the year of sale and the amount recovered by the sale of machinery could not be brought to tax under the second proviso to s. 10(2)(vii).
4. As already stated, two questions have been referred to this court. So far as the first part of the first question is concerned, namely, whether depreciation claimed in the earlier years is included in the words 'loss, expenditure or trading liability incurred by the assessee' used in s. 10(2A) of the Indian I.T. Act, 1922, the matter now stands covered by a decision of this court in Income-tax Reference No. 69 of 1965, decided on 14th August, 1974 (CIT v. Gagalbhai Jute Mills Ltd. - reported in : 116ITR602(Bom) infra]. In that case a similar contention was raised on behalf of the revenue that the amount by way of profit received by an assessee by sale of the items of machinery was negatived by the Division Bench and the Bench took the view that the amount realised by the sale of machinery could by no stretch of imagination be regarded as being in respect of the loss suffered by the assessee on account of depreciation allowance allowed to it for the earlier years for used of items of machinery in those years. The division Bench further pointed out that the fact that there is a specific provision in the second proviso to s. 10(2)(vii) for assessing the profits arising out of a sale of certain depreciated assets under certain circumstances is also a pointer in the same direction. In view of the decision in Gagalbhai Jute Mills, case (see p. 602 infra), it is not possible to accept the contention raised in this court on behalf of the revenue that the amount of Rs. 29,364 was liable to tax under s. 10(2A) of the Indian I.T. Act, 1922.
5. Now, the second part of the first question, namely, whether the said amount of Rs. 29,364 could be brought to tax under the second proviso to s. 10(2)(vii) of the Indian I.T. Act, 1922, is closely connected with the second question which has now been referred by the supplementary statement. It is contended on behalf of the revenue that there was no evidence whatsoever before the Tribunal for its finding that the machinery in question was not used for the purpose of the business of the business of the assessee in the calendar year 1959 which was the year of sale. The Tribunal has in the statement of the case referred to a letter addressed to the ITO on 6th October, 1960, by the chartered accountants of the assessee in which it was clearly stated thus :
'In the return of income submitted by our client the profit of 29,364 has not been shown as it is not taxable under section 10(2)(vii) of the Act, it being a profit on sale of machinery not used in the business during the year.'
6. The Tribunal has also referred to a statement filed on behalf of the assessee to the ITO specifically stating that the profits of Rs. 29,364 were not taxable under s. 10(2)(vii) (as machinery discarded at the end of previous year). Now, it is, no doubt, true that so far as the ITO was concerned, he chose to bring the said amount of Rs. 29,364 to tax under s. 10(2A), but the statement filed on behalf of the assessee and the letter dated 6th October, 1960, were a part of the record which both the AAC and the Tribunal were entitled to consider. It is obvious from the orders of the AAC and the Tribunal that they have accepted the statements referred to above as reflecting the correct position so far as the year of discarding the machinery is concerned. It cannot, therefore, be said that there was no material before the Tribunal to come to a finding that the machinery was discarded before the calendar year 1959. It is fairly not disputed by Mr. Joshi for the revenue that unless the revenue was able to show that the machinery in question was utilised by the assessee in the year 1959, the revenue could not invoke the provisions of the second proviso to s. 10(2)(vii). It is clear that the finding recorded by the Tribunal that the machinery was discarded in the year 1958 was a finding of fact. As already pointed out, there was evidence before the Tribunal which the Tribunal was entitled to accept and rely upon in order to arrive at the finding with regard to the point of time when the machinery was discarded by the assessee. Thus, we find that there was evidence before the Tribunal for finding that the machinery in question was not used for the purpose of the business of the assessee in the year 1959. The natural corollary of that finding is that the provisions of the second proviso to s. 10(2) (vii) could not be attracted.
7. In this view of the matter, both parts of the first question are answered in the negative, in favour of the assessee and the second question is answered in the affirmative, also in favour of the assessee. The revenue to pay the costs of the assessee.