CAPOOR J. - The Delhi Bench of the Income-tax Appellate Tribunal has referred the following question of law which arises from the order of the Tribunal in Income-tax Appeal No. 8229 of 1957-58 (Rohtak and Hissar District Supply Co. Ltd. v. Commissioner of Income-tax) :
'Whether the surplus of Rs. 2,51,576 over the written down value of the depreciation assets of the business of distributing electrical energy to the consumers was profit of the assessee chargeable to tax under section 10(2) (vii) of the Income-tax Act ?'
The facts as they appear from the statement of case and from the order of the Delhi Bench of the Income-tax Appellate Tribunal as well as the order of the Appellate Assistant Commissioner, Rohtak Range, dated July 20, 1957, from which the appeal was taken to the Tribunal, are as follows :
The Rohtak and Hissar Districts Electric Supply Co. Ltd., Rohtak (hereinafter to be referred to as the assessee) carried on the business of generation and supply of electric energy at Rohtak, Bhiwani Hissar and Hansi. This was under two sets of licences, one dated April 9, 1932 (the date of this licence has been wrongly given as April 30, 1934, in the order of the Income-tax Appellate Tribunal) was for the generation of electricity. In the second set were included four separate licences for the distribution and supply of electric energy to the consumers at Rohtak, Bhiwani, Hissar and Hansi respectively. The assessee thus came to generate electricity in accordance with first licence and distribute electric energy in accordance with other four licences. The account books relating to the two activities, i.e., generation and distribution of electricity, were kept separately. Sometime in 1954, certain shareholders of the assessee floated a private limited company known as the South Punjab Electricity Corporation (Private) Ltd. (to be referred to as the newly floated company) with the object of transferring to it that side of the business which concerned the distribution of electric energy. As on December 31, 1954, the assessee ceased to distribute electricity to the consumers in the areas for which it had held the licences for distribution. The assets so far as they pertained to the distribution of the electricity to the consumers were sold on January 1, 1955, to the South Punjab Electricity Corporation (Private) Ltd. This transfer resulted in a profit of Rs. 2,51,576 to the assessee in terms of clause (vii) of sub-section (2) of section 10 of the Indian Income-tax Act (hereinafter to be referred to as the Act) as the amount for which the plant and machinery which was used for distribution side of the assessees business was sold exceeded the written down value thereof by Rs. 2,51,576. In the assessment of the assessee for the accounting period from January 1, 1955, to December 31, 1955, i.e, the assessment year 1956-57, this amount of Rs. 2,51,576 was considered by the department as liable to tax in terms of the second proviso to clause (vii) of sub-section 10. The Income-tax Appellate Tribunal Delhi Bench, confirmed the treatment accorded to the said receipt and dismissed the assessees appeal against the order of the Appellate Assistant Commissioner. The assessee required the Tribunal to refer the question of law and that is how the matter is before us.
Section 10 of the Act, so far as is relevant, is as follows :
'10. Business. - (1) 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.
(2) Such profits or gains shall be computed after making the following allowances, namely :-
(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 buildings, 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 :
Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant which has been discarded or demolished or destroyed, and the amount of such moneys does not exceed the written down value, the amount allowable under this clause shall be the amount, if any, by which the difference between the written down value and the scrap value exceeds the amount of such moneys :......'
The arguments on behalf of the assessee before us, as before the Tribunal, are two-fold :
(1) That the assets so far as they pertain to the distribution of electric energy to the consumers were sold to the South Punjab Electricity Corporation before the commencement of the relevant accounting period and as such would not be comprised within the term, 'such plant, machinery, or building' as used in clause (vii).
(2) The business activity of the assessee so far as it concerned the distribution of electric energy to the consumers had ceased before the commencement of the relevant accounting period.
Mr. S. K. Kapur on behalf of the assessee has placed emphasis mainly on the first contention. He refers to clause (iv) of sub-section (2). Under clause (iv) the amount of any premium paid for insurance against risk or damage or destruction of building, machinery, plant, furniture, stocks or stores used for the purposes of the business, profession or vocation, is to be deducted while computing profits or gains of the business. The term 'such plant, machinery or building', as used in clause (vii) must also therefore be restricted to plant, machinery or building used for the purpose of business, profession or vocation. If any assets of this nature which may be termed as 'fixed capital' as opposed to 'circulating capital', had been sold before the commencement of the accounting year and were not used for any part of the accounting year, they would not attract the operation of clause (vii) of sub-section (2) of section 10. The assessee could not claim deduction on account of the amount by which the written down value thereof exceeds the amount for which the plant, machinery or the building, as the case may be, had been actually sold ipso facto if the amount for which the assets were sold exceeded the written down value of the assets, it could not be deemed to be profits of the previous year.
Mr. Kapur derived support for this part of his arguments from the judgment of their Lordships of the Supreme Court in Liquidators of Pursa Ltd. v. Commissioner of Income-tax. Their Lordships of the Supreme Court held :
'The words used for the purposes 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).
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.'
This case which fully supports the contention advanced on behalf of the assessee does not appear to have been cited before the Appellate Tribunal. Reliance was, however, placed on an unreported ruling of the Bombay High Court in Gujerat Ginning & . v. Commissioner of Income-tax. This is published at page 340 of unreported income-tax judgments of the Bombay High Court, Book One, as published by the Western India regional Council of the Institute of Chartered Accountants of India, Bombay. The Bench of the Bombay High Court consisting of Chagla C.J. and Tendolkar J. relied on the case of Liquidators of Pursa Ltd. v. Commissioner of Income-tax as being a direct authority for the point before them and if the learned members of the Appellate Tribunal had cared to read the judgment of the Bombay High Court based on the authority of the judgment of their Lordships of the Supreme Court, they would not have ignored the judgment of the Bombay High Court.
The facts of the case before the Bombay High Court were stated as follows :
'The accounting year is the calendar year 1948 and the assessment year is 1949-50, and the assessee company ceased to do business on March 20, 1946, and on December 14, 1946, it entered into an agreement for the sale of its plant and machinery. The sale was effected on January 3, 1948, and a sum of Rs. 2,20,000 as the sale price was also received on that day. In the year of account the assessee company did not carry on the business at all and the plant and machinery which was sold on January 3, 1948, was never used for the purpose of business during the year of account. The price received by the assessee company exceeded the written down value, and the department contended that this difference constituted income of the assessee company and under the second proviso to section 10(2) (vii) it was liable to tax.'
Repelling the above contention, it was held that it did not constitute income of the assessee under the second proviso to section 10(2) (vii) and, therefore, was not liable to tax. The ratio was that the plant and machinery etc. were not used at all for the purpose of business in the year of account and could not, therefore, be treated as 'such plant, machinery or building' within the meaning of the proviso.
The ratio of that case has been affirmed by their Lordships of the Supreme Court in Commissioner of Income-tax v. National Syndicate. At page 234, it is laid down as follows :
'If the profits or gains of a business for a particular year are to be taxed they must be computed for the whole year taking into account losses incurred during the same year. Now, the first condition precedent appears to be that the business must have been carried on by the assessee. This is to be found in the first sub-section of section 10. The second condition is that the building, machinery or plant must have been used for the purposes of the business. This is to be found in clause (iv) of the second sub-section of section 10. The third condition is that the sale, etc., should have taken place during the year of account. This follows from the nature of the tax which is assessed and levied on the profits of the working of the previous year. The fourth condition is that the loss should have been brought into the books of the assessee and written off. This is provided by the first proviso.'
The learned members of the Appellate Tribunal did not apply themselves to the ratio of the case cited before them and proceeded upon a line of reasoning which we have been unable to comprehend. This was that on December 31, 1954, while the assessee company transferred to the newly formed company the licences for distribution of electric energy to consumers, it retained its licence for distribution of electricity in the initial stages to the licensed distributors. The Tribunal considered that it would be wrong to say that the licence of the assessee so far as it pertained to the distribution of electricity had ceased to exist. This appears to be contrary to the finding of the Tribunal as it appeared in the earlier part of its order to the effect that the activity of distributing electricity along with the assets and liabilities of distribution business were sold to the newly floated company before the commencement of the relevant accounting year. The four licences for distribution were quite distinct from the licence for generation. According to the conditions of the four licences for distribution, the licensee was not to generate the energy but to only distribute energy received in bulk. After the transfer of the four licences for distribution to the newly floated company, that company had to receive energy in bulk from the assessee but this would not mean that the assessee carried on the business of distributing electric energy under the four licences which it had transferred to the newly floated company. The argument which weighed with the Tribunal is, therefore, of no validity and was not supported by Mr. D. N. Awasthy on behalf of the respondent. The ruling of the Punjab High Court in Crown Flour Mills v. Commissioner of Income-tax relied upon by the Tribunal is also of no relevance for the matter under consideration and this also had to be conceded by Mr. Awasthy.
Mr. Awasthy on behalf of the respondent put forward a new argument. He maintained that there was nothing in the order of the Tribunal or the statement of the case to indicate at what exact point of time were the assets and liabilities of the assessee, so far as they pertained to the distribution of electricity to the consumers, were sold to the newly floated company and if they had remained with the assessee for a few hours or even minutes on January 1, 1955, it could not be said that they were used by the assessee in its business during the relevant accounting year and hence the principles laid down by their Lordships of the Supreme Court in Liquidators of Pursa Ltd. v. Commissioner of Income-tax did not apply. It is impossible to give any weight to this argument at this stage. In paragraph 2 of the order of the Tribunal dated April 20, 1959, it is mentioned that on December 31, 1954, the activity of the distribution of electricity of the company was sold along with the assets and liabilities of that activity to the newly floated company. The argument on behalf of the assessee before the Tribunal was also that this part of the activity had ceased on December 31, 1954. It is, therefore, futile to argue that the machinery and plant pertaining to the distribution activity of the assessee were used in the assessees business during any part of the accounting year.
The result therefore is that the first contention advanced by Mr. Kapur on behalf of the assessee must prevail and our answer to the reference is in the negative. The assessee will have costs against the respondent which are assessed at Rs. 250.
GROVER J. - I agree.
Reference answered in the negative.