RAJAGOPALAN, J. - The assessee, a public company, adopted the calendar year as its year of account for the business it carried on. The company resolved on October 30, 1954, to liquidate itself voluntarily, and the business of the company which was carried on for little longer was completely stopped by about the middle of December, 1954. In 1955, during no portion of which did the company carry on any manufacture or business, the liquidator sold its factory premises and machinery to Carborundum Universal Ltd. which was also a public company. The agreement of sale on February 10, 1955, was followed up by the deed of sale on March 10,1955. The sale price of Rs. 10 lakhs was made up of (1) Rs. 1,00,000 the value of the land, (2) Rs. 1,31,732 which was taken as the value of the buildings, and (3) Rs. 7,68,268, which was taken as the value of the machinery. The valuation of the buildings and machinery was on the basis of reports of experts in such valuation-see annexure 'C' and 'D'. The books of the assessee company showed that the original cost of the buildings was Rs. 3,46,034 and that its written down value was Rs. 1,08,321. The cost of the machinery was Rs. 3,90,148 and its written down value was Rs. 90,098. The total amount of the depreciation allowed in the past for both the buildings and the machinery amounted to Rs. 5,36,034. The sale thus resulted in an excess realisation of Rs. 23,411 over the written down value of the buildings. In the case of the a machinery, the sale price exceeded the difference between the cost and the written down value, and that excess was Rs. 3,00,050.
The department claimed that the profits of the sale should be brought to tax in the assessment year 1956-57 under the second proviso to section 10(2)(vii) of the Income-tax Act. The assessee; s contentions were overruled, and the Tribunal ultimately sustained the claim of the Department.
The quantum of the profits to be taxed was also a point the controversy between the assessee and the Department. The Income-tax Officer declined to accept the valuation on the basis of which the vendor and the vendee entered into the transaction of sale, which, in the opinion of the Income-tax Officer, was tainted with collusion and manipulation. He held that the assessee had realised in full the original cost of both the buildings and the machinery, and that the entire amount of Rs. 5,36,034 which had been allowed as depreciation in the past fell to be taxed. The appellate Assistant Commissioner accepted the assessees contention under this head and held that the valuation was genuine, and there was no taint of collusion or manipulation and that quantum of the profits to be taxed was only Rs. 3,23,461, which represented the total of Rs. 23,411 and Rs. 3,00,050 which we have referred to above. The Tribunal allowed the appeal of the Department in part and held that the profits realised by the sale of the buildings should be estimated at Rs. 1.25.000. That with sale of the buildings should be estimated at Rs. 1,25,000. That with Rs. 3,00,050, the computation of which was never in issue, yielded Rs. 4,25,050 as the quantum of the profits assessable under the second proviso to section 10(2)(vii).
At the instance of the assessee the Tribunal referred both the question at issue. The questions referred under section 66(1) of the Act were :
'(1) Whether the assessee was properly assessed on Rs. 4,25,050 as profit under the proviso to section 10(2)(vii) of the Act ?
(2) Whether there were materials for the Tribunal estimating the sale value of the buildings at Rs. 2,32,973 ?'
The second question is easier of answer. The appellate Assistant Commissioner differed from the Income-tax Officer and held that there was no collusion, fraud or manipulation, and that the valuation of the experts as disclosed by annexure 'C' and 'D' was genuine. That in effect meant that he accepted their reports as disclosing the true market value of the buildings and the machinery on the date of the sale. The Tribunal did not differ from the Appellate Assistant Commissioner on the question of the genuineness of the valuation of the experts. The Tribunal recorded :
'........the valuation certificates of the buildings and machinery must have been obtained by the vendee company in connection with its floating for purpose of its prospectus or statements in lieu of prospectus. This point of view is certainly not the point of view that is required for the purpose of determination of the profit of the assessee under section 10(2)(vii) value that is to be adopted is the replacement cost of all the buildings that the assessee owned as at the date of sale. The engineers report is therefore no guide.'
After pointing out that the buildings in question had been put up on and after 1939 and that the cost of construction had since then gone up, the Tribunal proceeded :
'The written down value of all these buildings at Rs. 1,08,321 cannot, therefore, represent the true value at the time of sale. The value given in the agreement being only for the part handed over also can be no basis. The value has therefore necessarily to be estimated. Having due regard to all these facts, in our opinion, on the materials available, the sale price of buildings can reasonably be estimated at Rs. 2,32,963 so as to give a profit on sale of Rs. 1,25,000'
We presume that when the Tribunal referred to the 'replacement cost' what it had inview was the real market value on the date of the sale, allowing for the rise in prices and also for the depreciation of the buildings which had been constructed some time back. There was however no basis for the finding of the Tribunal, that the assessee should have made a profit of Rs. 1,25,000 by the sale of the buildings. The position was that the Tribunal did not reject the genuineness of the valuation made by experts, and it had no material either for the estimates it purported to make, the estimate either of the sale value or of the profits realised by the sale of the buildings. As we said, the value fixed by the experts represented the real markets value of the buildings as also that of the machinery. There was no evidence contra.
We answer the second question in the negative. The sale value of the buildings was that disclosed by the assessee and accepted by the Appellate Assistant Commissioner -Rs. 1,31,732.
As a result of our answer to the second question, the figure of Rs. 4,25,050 mentioned by the Tribunal in the first question needs revision. In other, even if the assessee is liable to be taxed under the second proviso to section 10(2)(vii), the quantum of the 'deemed profits' on which the assessee could be taxed should be that fixed by the Appellate Assistant Commissioner, Rs. 3,23,461 minus Rs. 23,411, being the deemed profits by the sale of the buildings and Rs. 3,00,050 being the deemed profits realised by the sale of the machinery.
The relevant portion of section 10 as it was amended by Act LXVII of 1949 ran :
'10. (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 or 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 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.
Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business of 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.
The second provision was amended in 1949. Before it was amended the second proviso 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.'
It is a fiction that the second proviso to section 10(2)(vii) enacted. The profits made by the sale of such capital assets as machinery and buildings, which would not otherwise be assessable as trading profits, are deemed by the proviso to be profits assessable to tax, within the limits specified in the proviso. What is the content of that statutory fiction is what we have to consider.
The scope of the second proviso before it was amended in 1949 was examined by the Supreme Court in Liquidators of Pursa Ltd. v. Commissioner of Income-tax. In that case the sale of the machinery was effected on December 7, 1943, in the accounting year of Pursa Ltd., the vendor company, which commenced on October 1, 1943. It was established that even before the commencement of that year of account, even in August, 1943, the vendor company ceased to manufacture sugar and therefore ceased to employ the machinery for any business it carried on. Negotiations commenced then to sell the factory and the machinery culminated in the sale on December 7, 1948. The Supreme Court held that the sale by the company in the course of winding up its business was not an operation in furtherance of the business the company had carried on. The Supreme Court also held that, as the machinery and plant had not at all been used during any portion of the accounting year for any business carried on by the assessee, no allowance could be claimed under section 10(2)(vii), and that the second proviso also did not come into play. After setting out the relevant provisions of section 10, their Lordships stated at page 272 :
'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' the fundamental idea underlying each of these words is the continuous exercise of an activity and the same central idea is implicit in the words carried on by him occurring in section 10(1) and those critical words are an essential constituent of that which is to produce the taxable income. Therefore, it is clear that the tax is payable only in respect of the profits or gains of the business which is carried on by the assessee. Sun-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 the proviso clearly 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.g., clauses (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 purpose 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 carried on and the profits of which are assessable under section 10(1). It is however 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 in 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.'
At page 274 their Lordships held :
'......the machinery and plant which were sold had not at all been used for the purposes of the business carried on in the accounting year and consequently the second proviso to section 10(2)(vii) could have no application to the sale proceeds of such machinery and plant'
After pointing out that the company had ceased to carry on any business even before the commencement of the year of account in which the machinery was sold, the Supreme Court pointed out at pages 274-75 :
'If the profits on the sale of the machinery and plant are to be made assessable under the second proviso, as has been done by the Tribunal, then it must be conceded that these deemed profits were not in reality the profits of the business carried on by the company, and, therefore, the sale transaction which brought in the these profits was not in fact part of the companys business.'
The decision of the Supreme Court was, as we said, with reference to the second proviso as it stood before it was amended in 1949. To what extent has that position been altered by the amended proviso directs its application even it the sale was effected after the cessation of the business, that is, the business 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) nor the liability imposed by the second proviso comes into play, if the machinery the building 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 has carried on his business during at least at portion of the year in which the sale took place, and that condition was satisfied the amended proviso enabled the Revenue to bring a tax the deemed profits of the sale, even if the sale was effected after the assessee had ceased to carry on his business. The learned counsel pointed out that in the present case the Tribunal accepted the factual position, that the assessee company had ceased to carry on any business after the middle of December, 1954. It did not carry on any business during any portion of 1955. 1955 would have been its year of account had it carried on any business. But it was not its previous year within the meaning of the proviso, as it did not carry on any business in the context of section 10 read as a whole or in the context of even section 10(2)(vii) and its proviso. 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 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 and the sale, so long as the sale and the stoppage of the business were not both in the same year of account or in 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 the section 10(2)(vii) is : (1) what is not a trading profit is deemed to be a trading profit assessable to tax, and (2) that a trading profit is deemed to accrue 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 dispenses 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. The significance of both these expressions was explained at length by the Supreme Court in Liquidators of Pursa Ltd v. Commissioner of Income-tax.
In Commissioner of Income-tax v. Express Newspapers Ltd. this court said at page 62 :
'One contention on behalf of the assessee was that under the provisions of section 10(2)(vii) the sale which resulted in the profit should have taken place while the company was carrying on business, and that condition was not satisfied in the present case, as the Free Press Company had ceased to carry on any business on August 31,1948. The sale effected on November 1,1946 being only one after cessation of the business, any profit obtained thereunder could not be said to be income from business or revenue profit but a capital one...... But in the present case the sale of the machinery took place during the year of account, and it was used by the Free Press Company for at least a part of the year. This would be sufficient to attract the liability.'
But on another point the contention of the assessee was upheld :
'The learned counsel for the assessee is on a firmer ground when he contended that the sale being made in the process of winding up of the company section 10(2)(vii) will not apply. The second proviso to the section 10(2)(vii) would be invoked only where the sale was one made in the course of business carried on by the predecessor. Where the sale is a closing down sale that profit could not be brought to tax.'
Reliance was placed for this on Liquidators of Pursa Ltd. v. Commissioner of Income-tax.
It was that second bar that the amended proviso removed. The realisation are now taxable as 'deemed profits' even if the sale is after the business ceased, and even if the sale is in the course of liquidation after the cessation of business. But if the business ceased in a year of account anterior to the year of sale the proviso does not enact a fiction that the assessee shall be deemed to have a business and a previous year therefor for the purpose of taxing the excess sale proceeds.
We are clearly of opinion that the amendment of 1949 did not remove one of the difficulties pointed out in Liquidators of Pursa Ltd. v. Commissioner of Income-tax for the realisation of the sale of machinery and buildings to be taxable under the proviso, these buildings and machinery must have been used for the purpose of the business of the assessee, at least during some portion of the year of sale which constituted the accounting or the previous year of that assessee and for that business.
In the Income-tax Act by Kanga and Palkhivala, fourth edition at page 355, the learned authors stated thus :
'The amendment made by Act LXVII of 1949 makes this proviso applicable whether the sale of 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 the 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 assessees business at any time during the accounting year, neither clause (vii) nor the second proviso thereto would come into operation and therefore the excess realised on such sale over the written down value would not be liable to tax.'
That, in our opinion, correctly sums up the position.
Though it was the calendar year that the assessee adopted as its accounting year and the previous year for purposes of assessment while it continued to carry on its business, since it did not carry on any business in the calendar year 1955 in which the liquidator effected the sale, that could not be the previous year for the assessment year 1956-57. The assessee company had no income to be computed under section 10 for the assessment year 1956-57. It had no 'deemed profits' either to be computed as a the profits of any business in 1956-57. As we said, the existence of the business, profits of which could be computed under section 10 and the existence of a previous year for that business, had to be factual. They cannot be fictional. The proviso to section 10(2)(vii) did not enact any such fictions either in express terms or even by necessary intendment to give effect to the fictions specifically enacted.
Mr. Ranaganathan, who presented the case for the Department with considerable ability and thoroughness, submitted an alternative line of argument, that the word 'profits' in the second proviso should not be confined to the profits of a business-we are not now concerned with the allied sources, profession or vocation-but it should be given the normal meaning of any profit arising out of a transaction like a sale. Such a profit or income, he contended, would still, be taxable income even if the computation of that profit or income could not be under section 10 on the ground that there was no business of which it could be deemed to be a profit; it would be taxable under section 12 as income from other sources. The sale proceeds in this case were assessed as the 'deemed profits' of the assessees business. The assessee had no business, and we have held in effect that the proviso to section 10(2)(vii) does not authories taxation of the deemed profits of a deemed business. The question, whether the sale proceeds deemed to constitute a profit of a transaction independent of any business can be taxed under section 12 was never considered at any stage, and such a question cannot be said to arise on the order of Tribunal. It would constitute a new claim by the Department, involving a fresh investigation of facts, including the question whether for purpose of computation under section 12, the date of sale was within the previous year relevant to the assessment year 1956-57. We must decline to allow the Department of put forward 66(1), whether on the facts and in the circumstances established in this case, the assessment can be sustained by reading the second proviso to section 10(2)(vii) with section 12 of the Act. That the proviso is really a charging provision in computing the profits of a business under section 10, though it purports to be framed as a proviso to section 10(2)(vii) cannot admit of any doubt. But we express no opinion on the further contention of the learned counsel of the Department that it was a general charging provision, whatever be the source of the income, business or other source. In effect, the learned counsel for the Department wanted the 'deemed profit' to be read as the 'deemed income' for all purposes.
Our answer to the first question is that no portion of the sale proceeds realised by the assessee company in 1955 was assessable to tax as income deemed under the second proviso to section 10(2)(vii), to be profits of any business of the assessee.
The assessee will be entitled to the costs of this reference. Counsels fee Rs. 250.
Questions answered accordingly.