1. This is a reference made by the Income-tax Appellate Tribunal, Madras Bench, at the instance of the Commissioner of Income-tax. Bangalore, under section 66(1) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the 'Act') in I.T. As. Nos. 6585 to 6587 of 1961-62 on its file.
2. The learned judge set out the statement of case which ran as follows :
The assessee derived income from securities, from properties, money lending business and petrol business. He also conducted a beer tavern. The accounting years concerned in these appeals are the year ending on June 30, 1954, June 30, 1955, and June 30, 1956. In the year ending on June 30, 1953, the assessee had abkari contract. During the years under reference the assessee had no such abkari contract. The assessee had maintained a fleet of lorries for transporting toddy from the palm groves to the various shops which were spread over a wide area. Depreciation was allowed on these lorries up to and inclusive of the assessment year 1954-55.
3. In the year ending on June 30, 1954 (assessment year 1955-56), the assessee sold four lorries. In the assessment year 1956-57, the assessee sold two lorries and in the assessment year 1957-58, eleven lorries.
4. Out of the four lorries sold in the assessment year 1955-56, there was a loss in the sale of one amounting to Rs. 786. In regard to the other three lorries the difference between the written down value and the sale proceeds amounted to Rs. 7,414.
5. Out of the two lorries sold in the assessment year 1956-57, there was a loss in the sale of one and in regard to the other, there was a difference of Rs. 2,500 between the written down value and the sale proceeds.
6. In the assessment year 1957-58, the difference between the written down value and the sale proceeds amounted to Rs. 22,594. Copy of the assessment order is annexure 'A' and forms part of the case.
7. There is no dispute about these figures.
8. In the assessment years 1955-56 and 1956-57, the Income-tax Officer disregarded the losses but brought to tax the sums of Rs. 7,414 and Rs. 2,500 as profits assessable under the second proviso to section 10(2) (vii). Similarly, the sum of Rs. 22,594 was brought to tax. Copies of the orders of the Income-tax Officer are annexures 'B' and 'B-1' and form part of the case.
9. The assessee appealed to the Appellate Assistant Commissioner, against the assessment of the sum mentioned above. There were other points, but we are not concerned with them in these references.
10. It was contended that the provisions of section 10(2)(vii) did not apply when the sale took place after cessation of the business and when the source of income had been lost. The decision of the Supreme Court in Liquidators of Pursa Ltd. v. Commissioner of Income-tax was relied upon by the assessee.
11. The Appellate Assistant Commissioner observed that the decision above referred to related to a case before the amendment of the relevant section and that in view of the introduction of the words in the section by the amendment viz., 'Whether during the continuance of the business or after the cessation thereof', the Income-tax Officer was justified in including the profits under section 10(2)(vii). Copy of the order of the Appellate Assistant Commissioner is annexure 'C' and forms part of the case.
12. There were further appeals to the Tribunal. It upheld the contention of the assessee. After referring to a passage in the decision of the Supreme Court in Liquidators of Pursa Ltd. v. Commissioner of Income-tax it observed that 'the Supreme Court held that two conditions were necessary to being into operation the liability under section 10(2)(vii), second proviso, and those were; (i) that the assessee must have been carrying on a business; and (ii) that the assessee must have used the asset for any part of the accounting year in the said business. The amendment made in 1949 dispensed with the first requirements viz., the need to carry on business. It may be mentioned that even after the cessation of the business the sale of an asset would attract the liability. However, no amendment has been made so as to dispense with the user of the asset in any part of the relevant account year. We have, therefore, to hold that as those assets were not used during the relevant years, the conditions of the second proviso to section 10(2)(vii) were not satisfied so as to bring into operation the liability contemplated therein. This position has been laid down by the Madras High court in the decision in Ajax Products Ltd. v. Commissioner of Income-tax.
13. It further observed that 'A harmonious construction, in our opinion, would be to allow a liability under the second proviso to section 10(2) (vii) to arise only in these cases where the assessee ceases to carry on business in the accounting year and the asset being sold after the cessation of the business in the same year. The order of the Tribunal is annexure 'D' and forms part of the case.
14. The question of law is : 'Whether the sums of Rs. 7,414 Rs. 2,500 and Rs.22,594 were assessable in the assessments years 1955-56, 1956-57 and 1957-58 under the second proviso to section 10(2)(vii) ?'
15. In this case we are called upon to consider the true scope of the second proviso to clause (vii) of sub-section (2) of section 10 of the Act. To pronounce on that question, it is necessary to bear in mind the requirements of sub-section (1) of section 10. That sub-section reads :
'The tax shall be payable by an assessee 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'
16. Sub-section (2) of section 10 enumerates the allowances to be deducted in computing the profits or gains mentioned in sub-section (1). Clause (vii) of sub-section (2) of section 10 provides for allowances for depreciation of building, machinery, plant or furniture used for the purpose of carrying on the business, profession or vocation mentioned in section 10(1). Clause (vii) of section 10(2) provides :
In respect of any such building, machinery or plant which has been sold or discharged 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 :
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....'
17. In this case, we are concerned with the profits or gains made in a 'business'. These profits or gains must have accrued in the accounting years, relevant to the assessments years. Quite clearly the profits or gains referred to in the statement of the case did not accuse during the relevant accounting years. That being so, prima facie, the same is not assessable to tax.
18. It was urged on behalf of the revenue that the second proviso to clause (vii) of section 10(2) as amended in 1949 specifically brings within the net of taxation the gains or profits made by the sale of assets of the business 'whether during the continuance of the business or after the cessation thereof' and therefore the question whether the sale was made during the continuance of the business or not is irrelevant. That is true. But the fact remains that the assets sold must have been used carrying on the business during the relevant accounting years.
19. The second proviso to clause (vii) of section 10(2) prior to its amendment in 1949 ran;
'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.'
20. The scope of this proviso came up firm consideration before the Supreme Court in Liquidators of Pursa Limited v. Commissioner of Income-tax This is what the Supreme Court held (see at pages 272 and 273 of the report) :
'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 in 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, the fundamental idea underlying each of these words is the continues exercise of an activity and the same idea is implicit in the words 'carried on by him ' occurring in section 10(1) and those critical wards are an essential constituent of that which is to produce the taxable income. Therefore, it is clear that 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 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. e.g. clauses b(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 vocation.' 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 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 the 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, m clear that in order to attract the operation of 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 of them and the second proviso also does not come into operation.
21. Interpreting the second proviso, as it stood prior to its amendment in 1949, the Supreme Court in the above decision laid down that in order to attract the applicability of that proviso, two requirements have to be established, namely : (1) the assets sold should have been used for the purpose of carrying on the business at some time during the relevant accounting year. and (ii) that it should have been sold during the continuance of the business,. After the amendment in 1949, the second requirement has now become unnecessary. But it is still necessary that the assets sold should have been used for the purpose of carrying on the business at least for sometime during the relevant accounting year.
22. The above conclusion of mine is supported by the decision of the Madras High Court in Ajax Products Ltd. v. Commissioner of Income-tax. Dealing with the amendment second proviso, this is what Rajagopalan J., who spoke for the Bench, observed at pages 150 and 151.
'To what extent has that position been altered by the amendment effected in 1949, is the next question. In express terms the amendment proviso directs its application even if the sale was effected after the cessation of the business, that is, the business the assessee had carried on. The contention of the learned counsel for the assessee was that the other basic principle laid down in Liquidators of Pursa Ltd. v. Commissioner of Income-tax was left unaffected by the amendment of 1949. Neither the right conferred by section 10(2)(vii) not the liability imposed by the second proviso comes into play, if the machinery and buildings sold had not been used by the assessee for any business of his during any portion of the year of account in which the sale is effected. The learned counsel urged that the amended proviso applied only if the assessee had carried on his business during at least a portion of the year in which the sale took place, and that once that condition was satisfied the amended proviso enabled the revenue to bring to tax the deemed profits of the sale, even if the sale was effected after the assessee had cased to carry on his business..... There could not be any 'previous year' for taxing profits or the deemed profits of a business, if the assessee carried on no business at all during that period. If a person stopped his business in 1950, but sold in 1960 the machinery or buildings which he had used for that business which had ceased, the excess of the sale proceeds over the written down value of 1950, when he had carried on his business, would not come within the scope of the proviso. It was the cessation of business that was material, not the interval between the cessation of the business and the sale, so long as the sale and the stoppage of the business were not both in the same year of account or the same 'previous year'. That contention of the learned counsel for the assessee seems, in our opinion, well founded.
With reference to a business, to which we shall confine ourselves, the fiction enacted by the second proviso to section 10(2)(vii) is : (1) what is not a trading profit is deemed to be trading profit assessable to tax, and (2) that a trading profit is deemed to accrued to the assessee in the year of sale. Despite the express reference to the cessation of the business in the amended proviso, it does not, in our opinion, enact a further fiction, that the assessee shall be deemed to carry on the business in the year of sale. That he should have carried on his business in the year of sale is a factual requirement of the proviso., No fiction comes into play. All that the amended proviso, in effect dispense with is the further continuity of the business up to the date of the sale,. These follow, in our opinion, the use of the qualifying word 'such' in relation to the buildings and machinery and also the retention of the expression 'previous year 'in the proviso even after the amendment.'
23. A similar view was taken by Kanga and Palkhivala, the learned authors of The Law and Practice of Income-tax,. fourth edition at page 355, complaining the scope of the second proviso to section 10(2)(vii) thus :
'The second proviso brings to charge the excess of the sale price over the written down value, and it applies not only to cases where some of the assets are sold but also to cases where the whole business under taking is sold. If, however, the sale price exceeds the original cost, such excess over the original cost would not be chargeable under this proviso, though it may be chargeable as capital gains under section 12B. The effect of this proviso, in other words, is that where the sale proceed s plus the aggregate of the depreciation allowances already made exceed the original cost the excess or the aggregate of the depreciation allowances which ever is less, is taxable as profits. The amendment made by Act 47 of 1949 makes this proviso applicable whether the sale of a building, machinery, or plant takes place 'during the continuance of the business or after the cessation thereof.' But if the sale is effected in any year subsequent to the year of closure of the business this proviso cannot possibly apply, for section 10 itself would have no application in such year to the defunct business. The Supreme Court held in Liquidators of Pursa Ltd., v. Commissioner of Income-tax that if the assets sold were not at all used for the purposes of the assessee's business at any time during the accounting year, neither clause (vii) nor the second proviso there to would come into operation and therefore, the excess realised on such sale over the written down value would not be liable to tax. The same principle would apply to cases arising under the fourth proviso.'
24. I think that this is the correct view of the law.
25. I do not think that the decision in Niranjan Lal Ram Chandra v. Commissioner of Income-tax quoted by the learned counsel for the revenue is apposite for our present purpose. It bears on a different principle of law.
26. For the reasons mentioned above, our answer to the question referred to us is in the negative and in favour of the assessee.
27. The Commissioner of Income-tax, Bangalore, shall pay the cost of the assessee. Advocate's fee Rs. 250.
28. Questions answered in favour of the assessee.