TMI Blog1960 (12) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... inery. The valuation of the buildings and machinery was on the basis of reports of experts in such valuation-see annexures C and D . The books of the assessee company showed that the original cost of the buildings was ₹ 3,46,034 and that its written down value was ₹ 1,08,321. The cost of the machinery was ₹ 3,90,148 and its written down value was ₹ 90,098. The total amount of the depreciation allowed in the past for both the buildings and the machinery amounted to ₹ 5,36,034. The sale thus resulted in an excess realisation of ₹ 23,411 over the written down value of the buildings. In the case of the machinery, the sale price exceeded the difference between the cost and the written down value, and that excess was ₹ 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 in controversy between the assessee and the Department. The Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point of view that is required for the purpose of determination of the profit of the assessee under section 10(2)(vii) . . . . . . . the 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 engineer's 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 ₹ 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 ₹ 2,32,963 so as to give a profit on sale of ₹ 1,25,000 . . . We presume that when the Tribunal referred to the replacement cost what it had in view 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e took place. The second proviso 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 [1954] 25 ITR 265. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment 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) . . . 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 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. 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 point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... text 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 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 to 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 s case (supra), for the realisations 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 of 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 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 the clos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in effect that the proviso to section 10(2)(vii) does not authorise 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 the Tribunal. It would constitute a new claim by the Department, involving a fresh investigation of facts, including the question whether for purposes 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 to put forward a new case for investigation at this stage in proceedings under section 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 contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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