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TMI Blog1964 (5) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... r called the assessee-company, the right to print and publish the said newspapers from September 1, 1946, letting out its machinery and assets and authorising the assessee-company to collect the book debts and pay off the liabilities of the Free Press Company. The assessee-company accordingly started publishing newspapers from September 1, 1946. On October 31, 1946, the Free Press Company resolved at a general body meeting to wind up the company voluntarily. The liquidator appointed thereunder was directed not to carry on the business of the company. On November 1, 1946, the liquidator ascertained the value of the assets over the liabilities taken over by the assessee-company as per the balance-sheet at Rs. 19,36,000 and this amount was credited to the account of the two directors of the Free Press Company in the assessee's books. The profit of the Free Press Company was worked out to be Rs. 6,08,666, being the difference between the written down value and the sale price of the machinery. That sum was made up of : (i) the difference between the original cost price and the written down price of the machinery...Rs. 2,14,090, (ii) the amount in excess over the original cost price... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cond item of Rs. 3,94,576 representing the capital gains made by the Free Press Company is assessable in the hands of the assessee-company, who succeeded to the said business, under section 26(2) of the Act. Learned counsel for the respondent contended that neither the conditions laid down in section 10(2)(vii) of the Act nor those laid down in section 26(2) thereof attracted the said two items of income and, therefore, they were not assessable in the hands of the assessee-company. The first question turns upon the relevant provisions of section 10 of the Act. To have a clear view of the scope of the relevant provisions it will be convenient to read them at one place. " 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 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 :... (iv) in respect of insurance against risk of damage or destruction of buildings, machinery, plant, furniture, stocks or stores, used for the purposes of the business, profession or vocation the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be ascertained only in its relation to the other related provisions. Under section 3 of the Act, income-tax shall be charged for any year in accordance with and subject to the provisions of the Act in respect of the total income of the previous year of every assessee ; under section 6, one of the heads of taxable income is " profits and gains of business, profession or vocation " ; under section 10(1), the tax under that head is payable in respect of profits or gains of any business carried on by the assessee during the accounting year. The main condition which attracts all the other sub-sections and clauses of the section is that the tax shall be payable by an assessee in respect of the profits or gains of business, etc., carried on by him. The crucial words are " business carried on by him ". If the profits or gains were not earned when the business was being carried on by the assessee during the accounting year, they would fall outside the provision of section 10(1). For instance, if the machinery was sold after the business was closed or when the business was under liquidation, it would not be appropriate to hold that the profits or gains earned by the sale were in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of manufacturing sugar or any other purpose except that of keeping them in trim and running order. In the assessment of the company to income-tax for the accounting period from October 1, 1943, to September 30, 1944, the income-tax authorities treated the surplus made by the company on the sale of the buildings, plant and machinery as profits under proviso (2) to section 10(2)(vii) of the Act. This court held that the said amount was not taxable. This court rejected the contention of the revenue that the said excess was taxable on two grounds, namely, (1) " the sale of the machinery and plant was not an operation in furtherance of the business carried on by the company but was a realisation of its assets in the process of gradual winding-up of its business which eventually culminated in the voluntary liquidation of the company ", (2) " even if the sale of the stock of sugar be regarded as carrying on of business by the company and not a realisation of its assets with a view to winding-up, the machinery or plant not being used in the accounting year at all and in any event not having had connection with the carrying on of that limited business during the accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principles which govern the proviso cannot be used to govern the main clause, because profit and loss arise in different ways in business. The two rulings do not, therefore, apply to the facts here." It is contended that the principle accepted by this decision is in conflict with that laid down in the case of the Liquidators of Pursa Ltd. It is said that the condition that the sale of the machinery at a loss should have been before the closing of the business is impliedly laid down by section 10(1) of the Act which applies equally to clause (vii) as well as to the second proviso thereto, and that if the condition need not be fulfilled in the case falling under the substantive part of clause (vii) of section 10(2) of the Act, it will be incongruous to apply it to a case falling under the second proviso before it was amended. So stated there is some plausibility in the argument. But this court in express terms made a distinction between the scope of the substantive part of clause (vii) and that of the second proviso thereto and expressly distinguished those rulings on the ground that they would not apply to the construction of the substantive part of clause (vii). When this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect answer to the first question submitted to it. The second item relates to capital gains. That represents the excess of the price obtained on the sale of the machinery over its original cost price. It is conceded that it does not represent profits and gains of business, but it falls under the heading " capital gains ". But it is argued that, as the Free Press Company was wound up and, therefore, could not be found, the assessee, who had succeeded to it, would be liable to be assessed for the said capital gains under the proviso to section 26(2) of the Act. To appreciate the contention some of the relevant provisions of the Act may be read : " 6. Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing, namely :--.... (iv) Profits and gains of business, profession or vocation... (vi) Capital gains. 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 and gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses a clear-cut scheme. Though income-tax is only one tax levied on the total income, section 6 enumerates six heads whereunder the income of an assessee falls to be charged. This court in United Commercial Bank Ltd. v. Commissioner of Income-tax laid down that sections 7 to 12, are mutually exclusive and where an item of income falls specifically under one head it is to be charged under that head and no other. The expression " income, profits and gains " in section 6 is a composite concept which takes in all the six heads of income mentioned therein. The fourth head is " profits and gains of business, profession or vocation " and the sixth head is " capital gains ". Section 10 taxes the profits and gains of a business, profession or vocation carried on by an assessee ; it also enumerates the different kinds of allowances that can be made in computing the profits. Under section 10(1), as we have already pointed out, the necessary condition for the application of the section is that the assessee should have carried on the business for some part of the accounting year. Section 26(2) indicates the manner of assessment of the income, profits and gains of any business, profession or vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty which is called business and the latter accrues because capital assets are disposed of at a value higher than what they cost the assessee. They are placed under different heads ; they are derived from different sources ; and the income is computed under different methods. The fact that the capital gains are connected with the capital assets of the business cannot make them the profit of the business. They are only deemed to be income of the previous year and not the profits or gains arising from the business during that year. If that be the scheme of the Act, the contention of the learned counsel for the revenue can easily be answered. He asks that in section 26(2) deals with only profits and gains of the business, why should the legislature use the word " income " therein ? As we have indicated, the expression " income, profits and gains " is a compendious term to connote the income from the various sources mentioned in section 6 ; therefore, the use of such an expression does not efface the distinction between the different heads, but only describes the income from the business. The expression " profits " in the proviso makes it clear that the income, profits and gains in su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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