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Raja Bai Nikkam Vs. Commissioner of Income-tax, Mysore - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberIncome-tax Reference Case No. 22 of 1966
Judge
Reported in[1967]65ITR496(KAR); [1967]65ITR496(Karn); (1967)2MysLJ136
ActsIncome Tax Act, 1922 - Sections 10(2); Income Tax Act, 1961 - Sections 32, 37, 41 and 41(2)
AppellantRaja Bai Nikkam
RespondentCommissioner of Income-tax, Mysore
Appellant AdvocateK. Srivinvasan, Adv.
Respondent AdvocateS.R. Rajasekhara Murthy, Adv.
Excerpt:
.....and existing fuel station of petitioner were on either side of a high way. prohibition of distance between two adjoining stations would not apply. - during the calendar year 1961, she would up her business, sold the three lorries which she possessed as well as all other business assets, goodwill, etc. that fiction cannot be given effect to unless both the receipt of the money as well as the business whose income it is regarded to be, came about and existed in the same account year, in respect of which the assessment is made......which represent the value of the asset to the seller. where an idea of net price reduced by any brokerage or any other expenses is intended to be given, the statute or even documents use the expression 'net price'. if not, the price must be given its natural and normal meaning of being an equivalent of the value of the asset sold to the seller. 16. in the result, we answer the question against the assessee as follows : 'on the facts and in the circumstances of the case, the assessee was not entitled to the deduction of rs. 4,350 in the computation of the profits under section 41(2) of the income-tax act. 17. no costs. 18. question answered against the assessee.
Judgment:

Narayana Pai, J.

1. In this reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the assessee, the question referred is :

'Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction of Rs. 4,350 in the computation of the profits under section 41(2) of the Income-tax Act ?'

2. The relevant facts and circumstances are the following :

The assessee was carrying on the business of plying lorries under the name and style of 'Chamundi Meenakshi Transport' till the end of the calendar year 1960. Her accounting year was also the calendar year. During the calendar year 1961, she would up her business, sold the three lorries which she possessed as well as all other business assets, goodwill, etc. By way of sale of the three lorries, she received a total consideration of Rs. 87,000. During the preceding years she had been allowed depreciation on these lorries in the course of computation of her business income. The total depreciation so allowed, up to the end of the calendar year 1960, was Rs. 41,075. This amount was added to her other income during the calendar year 1961 by the Income-tax Officer and subjected to tax for the assessment year 1962-63.

3. In respect of this amount, which was added pursuant to sub-section (2) of section 41 of the Income-tax Act, 1961, the assessee claimed that she had, in fact, paid a brokerage of Rs. 5,100 to one M. Krishna Murthy, who had put through the sale of lorries, and contended that the said brokerage should be deducted from the above sum of Rs. 41,000 and odd. The Income-tax Officer rejected the contention. The Appellate Assistant Commissioner accepted the contention in substance, but reduced the allowable deduction at a sum of Rs. 4,350 and granted a deduction to that extent. Upon appeal by the department, the Income-tax Appellate Tribunal has reversed the decision of the Appellate Assistant Commissioner and restored that of the Income-tax Officer on this point.

4. It is with reference to this that the question framed above has been referred to this court for opinion at the instance of the assessee.

5. The question of depreciation in the matter of computing business income and its subsequent dealing, when the assets in respect of which the same had been allowed came to be realised with a certain known result, was originally dealt with in section 10 of the Act of 1922. The topic is now dealt with in two different sections under the new Act, namely sections 32 and 41. The former deals with rules for the purpose of deducting depreciation before computing business income. The latter in its second sub-section deals with a position arising out of realisation of the asset by sale or otherwise in respect of which the depreciation had already been allowed by way of deduction. The old proviso to section 10(2) (vii) of the Act of 1922, dealing with the topic, read as follows :

'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.'

6. The first paragraph of sub-section (2) of section 41 of the Act of 1961, which is the main provision, reads as follows :

'Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture as the case may be together either the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due.'

7. There is a proviso to this with which we are not concerned in this case. There is then an Explanation, which reads :

'Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year.'

8. The Explanation to sub-section (4) of section 41 states that the expression 'moneys payable' and the expression 'sold' in sub-sections (2) and (3) of section 41 shall have the same meaning as in sub-section (1) of section 32. The relevant portion of the definition which occurs in an Explanation to sub-section (1) of section 32 is :

''moneys payable' in respect of any building, machinery, plant or furniture includes - .... (b) where the building, machinery, plant or furniture is sold, the price for which it is sold.'

9. The Income-tax Appellate Tribunal in rejecting the case of the present assessee depended principally on this definition. They took the view that the price for which an article is sold within the meaning of the Explanation to sub-section (1) of section 32 means the gross price and not the net price after deducting brokerage, if any, paid for selling the asset. Before the Tribunal the assessee contended that, though, in fact, she had not carried on any business, the Explanation to sub-section (2) of section 41 raises the fiction that the assessee was actually carrying on a business during the account year in which the asset was sold and the money realised. She claimed, therefore, that on that footing the brokerage paid by her became a permissible item of deduction in computing her business income. This argument was also rejected by the Tribunal.

10. Now, so far as the main provision of sub-section (2) of section 41 of the Act of 1961 is concerned, it is not to any extent different in effect from the corresponding proviso in the old section 10(2) (vii) which we have already extracted. Both of them create a fiction that the surplus, if any, realised by the sale of assets should be deemed to be business income to the extent to which it is equal to or less than the depreciation actually allowed in previous years while computing the business income. Actually, the asset at all times remained a capital asset. But by reason of the fact that it had actually been used for business purposes, a theoretically calculated depreciation in respect of it is taken into account for abating the amount of the business income chargeable to tax under the Act. The deduction is made as stated on theoretical basis. But when the asset is actually sold had the resultant position is either that there was no depreciation at all or the depreciation was less than what had in fact been allowed on theoretical basis, the provision with which we are concerned applies a correction and tries to bring the assessment of business income in accordance with the actual facts. Indeed, the two sections, 32 and 41 of the Act of 1961, deal with the two aspects of the same question, viz., the abatement to be allowed in computing business income on account of actual loss suffered by reason of depreciation in assets actually used for business purposes; although the surplus as understood in the section is deemed to be or treated as business income, in actual event it is merely a realisation of a capital asset and, therefore, a capital receipt.

11. What is stated above is in accordance with the principle enunciated by the Supreme Court in Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd. Although that was a case which dealt with the position as under section 10(2) (vii) of the Act of 1922, for the reasons stated above, the position is not to any extent different under the first paragraph of sub-section (2) of section 41 of the Act of 1961.

12. If it is to be regarded as merely a capital receipt and not an item of receipt arising out of business, no question of any deduction on account of brokerage pursuant to section 37 of the Act of 1961 can arise. The same result also flows from the fact that the business of the assessee was plying lorries and not buying and selling lorries.

13. The learned counsel for the assessee, however, has suggested that, even on the basis of the principles enunciated by the Supreme Court in the case cited above, a further question does arise by reason of the further fiction created by the Explanation to sub-section (2) of section 41. He contends that if the business is regarded as still continuing, the said fiction taken along with the earlier fiction, if completed, viz., that the entire process of sale of the asset, realisation of the money, etc., must be regarded as one integrated business activity and that, therefore, amounts spent by way of brokerage must necessarily be regarded, even though by way of a fiction, as an item of expenditure wholly laid out for the purpose of business within the meaning of section 37.

14. We find it difficult to extended the fiction to the extent suggested in this argument. The purpose of the fiction set up by the Explanation is to give full effect to the first fiction in the main paragraph of this sub-section, viz., that what is in fact a capital receipt must be regarded as a business, income and be chargeable to income-tax as such. That fiction cannot be given effect to unless both the receipt of the money as well as the business whose income it is regarded to be, came about and existed in the same account year, in respect of which the assessment is made. That result was sought to be achieved by an amendment of the relevant proviso to the old section 10(2) (vii) in 1949 by introduction the expression, 'is sold, whether during the continuance of the business or after the secession thereof', but was held not to have that effect by a pronouncement of the Supreme Court. The present Explanation is obviously intended to meet that situation. Although in cases where certain circumstances exist a legal fiction will be token to have all the logical consequences arising out of that fiction, such extension also depends upon the purpose which the fiction is intended to serve. If, as we have pointed out above, the only purposes is to give full effect to the first fiction, the second fiction is really a part of the first fiction and both together complete the fiction necessary for giving effect to the object in view. We do not think, therefore, any further extension thereof, in the manner suggested by the learned counsel for the assessee, can be rightly postulated.

15. The only remaining question is whether the Tribunal was right in reading the expression 'price for which it is sold' as representing the gross price and not the net price. We think they are right because the normal meaning of the 'price' is 'the gross price', which represent the value of the asset to the seller. Where an idea of net price reduced by any brokerage or any other expenses is intended to be given, the statute or even documents use the expression 'net price'. If not, the price must be given its natural and normal meaning of being an equivalent of the value of the asset sold to the seller.

16. In the result, we answer the question against the assessee as follows :

'On the facts and in the circumstances of the case, the assessee was not entitled to the deduction of Rs. 4,350 in the computation of the profits under section 41(2) of the Income-tax Act.

17. No costs.

18. Question answered against the assessee.


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