TMI Blog1964 (5) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... ed against the order of the Madras High Court in a reference made to it by the Income-tax Appellate Tribunal under section 66(1) of the Income-tax Act, 1922, hereinafter called the Act. The facts leading up to the reference and relevant to the present enquiry are as follows : The Free Press of India (Madras) Ltd., hereinafter called the Free Press Company, was a private limited company carrying on business as printers and publishers of certain newspapers, namely, " Indian Express ", " Dhinamani " and " Andhra Prabha " at Madras, " Eastern Express " and " Bharat " at Calcutta and " Sunday Standard " and " Morning Standard " at Bombay. On August 31, 1946, the Free Press Company passed a resolution transferring to the Express Newspapers Limited, a new company formed on or about April 22, 1946, hereinafter 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 46, and the liquidator, on November 1, 1946, confirmed the transfer of the assets made by the Free Press Company to the assessee-company. Therefore, on November 1, 1946, the aforesaid machinery was sold yielding a profit of Rs. 6,0,666 to the Free Press Company, being the difference between the written down value and the sale price of the machinery. Broadly stated, the machinery was sold by the Free Press Company during the accounting year after it closed down its business and after it went into voluntary liquidation. On those facts learned counsel for the revenue raised before us the following two contentions : (1) the first item of Rs. 2,14,090 representing the surplus over the written down value of the machinery was assessable in accordance with the proviso to section 10(2)(vii) of the Act ; and (2) the second 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 attracte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the assessee is made liable to tax. As the sale price is higher than the written down value, the difference represents the excess depreciation mistakenly granted to the assessee. To illustrate : assume that the original cost of a machinery or plant is Rs. 100 and depreciation allowed is Rs. 25 ; the written down value is Rs. 75. If the machinery is sold for Rs. 100, it is obvious that depreciation of Rs. 25 was wrongly allowed. If it had not been allowed that amount would have swelled the profits to that extent. When it is found that it was wrongly allowed that profit is brought to charge. The second proviso, therefore, in substance, brings to charge an escaped profit or gain of the business carried on by the assessee. The scope of this proviso cannot be ascertained in vacuum. The conditions for its applicability 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, professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these were the conditions for the applicability of the said proviso, the sale of the machinery in the instant case having taken place after the business was closed and during the winding-up proceedings, it would fall outside the scope of the said proviso and therefore the first item is not assessable to tax. This point directly arose for consideration in Liquidators of Pursa Ltd. v. Commissioner of Income-tax. There, the assessee-company carried on the business of growing sugarcane and manufacturing and selling sugar. In the year 1943 it negotiated for the sale of the factory and other assets with the object of winding-up the company. It received a firm offer on August 9, 1943, and concluded the agreement of sale on December 7, 1943. Between August 9, 1943, and December 7, 1943, it never used the machinery and plant 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fell to be considered on a construction of the provisions of section 10(2)(vii) of the Act. This court, speaking through Hidayatullah J., held that the loss was a business loss, though the machines and the motor lorry were sold after the business was closed down, as the said machines and lorry were used for the purpose of the business during a part of the accounting year and were sold during the accounting year. This court, after noticing the decision under appeal and that of this court in Liquidators of Pursa Ltd. v. Commissioner of Income-tax and the amendment introduced in the second proviso to section 10(2)(vii) of the Act, observed : "But it is to be noticed that no such amendment was made in clause (vii) to exclude loss over buildings, machinery or plant after the closure of the business. It is thus clear that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was impossible to infer that the chemicals and raw materials were sold in the ordinary way of business or that the assessee-company was carrying on a trading business. This decision again accepts the distinction between a sale held in the ordinary way of business and that held for the purpose of winding-up the business and that in the latter case the profits accrued are not trading profits. This case no doubt did not turn upon the provisions of the second proviso to clause (vii) of section 10(2) of the Act, but the principle accepted therein is the basis for the application of section 10 of the Act and that will apply to all provisions of section 10, unless an exception is made in a particular provision. For the foregoing reasons we hold that the first item is not liable to tax and the High Court has given the correct 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 25, each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year : Provided that, when the person succeeded in the business, profession or vocation cannot be found, the assessment of the profits of the year in which the succession took place up to the date of succession, and for the year preceding that year shall be made on the person succeeding him in like manner and to the same amount as it would have been made on the person succeeded or when the tax in respect of the assessment made for either of such years assessed on the person succeeded cannot be recovered from him, it shall be payable by and recoverable from the person succeeding, and such person shall be entitled to recover from the person succeeded the amount of any tax so paid. " A conspectus of the said sections discloses 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e previous year in which the sale was effected. The fiction does not make them the profits or gains of the business. It is well settled that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate field. Sub-sections (2A) and (2B) of section 24 provide for the setting off of the loss falling under the head " capital gains " against any capital gains falling under the same head. Such loss cannot be set off against an income falling under any different head. These three sections indicate beyond any doubt that the capital gains are separately computed in accordance with the said provisions and they are not treated as the profits from the business. The profits and gains of business and capital gains are two distinct concepts in the Income-tax Act : the former arises from the activity 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
