TMI Blog1960 (11) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... r that clause. The High Court, therefore, answered the question in the negative. The High Court refused to grant a certificate to appeal to this court, but the Commissioner of Income-tax applied for and obtained special leave, and this appeal has been filed. - - - - - Dated:- 1-11-1960 - Judge(s) : S. K. DAS., M. HIDAYATULLAH., J. C. SHAH JUDGMENT The judgment of the court was delivered by HIDAYATULLAH, J.-----The Commissioner of Income-tax, Bombay Circle II, has filed this appeal after obtaining special leave, against the judgment of the High Court of Bombay in an income-tax reference under section 66(2) of the Income-tax Act. The National Syndicate, Bombay (referred to in this judgment as the respondent), was a firm consisting of three partners. This firm acquired on January 11, 1945, a tailoring business as a going concern from one Chambal Singh for Rs. 89,321. Included in this amount was the consideration paid for sewing machines (Rs. 72,000) and a motor lorry (Rs. 8,000). The assessment concerns the year of account of the respondent, January 11, 1945, to February 28, 1946. The business of the respondent was to prepare garments for Government Departments, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each the conclusion that the business had, in fact, been continued only till August 28, 1945. On the second question, the High Court was of opinion that the business having been carried on for at least a part of the account year, section 10(2)(vii) was applicable, and that, therefore, this allowance had to be made under that clause. The High Court, therefore, answered the question in the negative. The High Court refused to grant a certificate to appeal to this court, but the Commissioner of Income-tax applied for and obtained special leave, and this appeal has been filed. Before we deal with the question whether section 10(2)(vii) of the Indian Income-tax Act is applicable to the facts of this case, we may mention that during the course of the argument Mr. S. P. Mehta, counsel for the respondent, sought to reopen the first question. According to him, there was no evidence on which the Tribunal or the High Court could reach the conclusion that the business of the respondent had come to a close in August, 1945. We, however, did not permit him to raise this contention, partly because, in our opinion, such a contention could not be allowed to be raised at this stage in an appeal by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (2). Reference in this context is made to the first sub-section of section 10, where it is provided that the tax shall be payable by an assessee under the head " Profits and gains of business ..........." in respect of the profits or gains of any business, etc., " carried on by him. " The Department relies upon a decision of this court reported in Liquidators of Pursa Limited v. Commissioner of Income-tax. The respondent also relies upon the same ruling, and contends that it supports the case set up by it. The respondent also relies on a recent decision of the Madras High Court in Commissioner of Income-tax v. Express Newspapers Ltd. These two cases were decided under the second proviso to section 10(2)(vii) before its amendment in 1949. The second proviso reads : " 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. " The words und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that during the account year the machinery and plant were not at all used. No doubt, this court did give two reasons for its decision, but the primary consideration was the second ratio quoted above. This is clear from the following passage towards the end of the judgment : " Even if the sale of the stock of sugar be regarded as carrying on of the business by the company and not a realisation of its assets with a view to winding up, the machinery or plant not being used during the accounting year at all and in any event not having had any connection with the carrying on of that limited business during the accounting year, section 10(2)(vii) can have no application to the sale of any such machinery or plant. " Learned counsel for the respondent relies upon the passage last quoted, and urges that where the buildings, machinery or plant have been used for a part of the accounting period, the ruling cannot apply, and draws attention to the words " at all " used twice in the judgment. He argues that if the machinery or plant had been used for a part of the accounting year, the result would have been different. It is not possible to say how the case would have been decided in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) would not apply. In the present case, the formation of the new company was to take over the business of the old company. The lease of the machinery, the transfer of the right to carry on the business of publishing newspapers, and the ultimate sale of the machinery were part of the same scheme for winding up the Free Press Company. The sale of machinery was undoubtedly a closing down sale and the profit earned therein could not come in for assessment under section 10(2)(vii). " These two cases deal with the second proviso to section 10(2)(vii). Clause (vii) deals with loss and the second proviso with profits; but the proviso is not an exact counterpart of the clause. The proviso enacts a fiction which the main clause does not enact. The reason for the introduction of the fiction in the proviso appears to be this: Loss in business may take place in various ways. If the business requires more to run it than it produces, there is loss. Loss in business may also take place if the equipment with which business is done is lost, destroyed, or depreciates or suffers in value. The law takes note of the loss, and, provided it has been computed and brought into the books of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Income-tax v. Shaw Wallace Co. Ltd. it was pointed out by the Judicial Committee that the words " carried on by him " were " an essential constituent of that which is to produce the taxable income ; it is to be the profit earned by a process of production ". It was further pointed out that " business " had been defined in the Income-tax Act to " include any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture " and that it involved " a fundamental idea of the continuous exercise of an activity ". It was, however, pointed out that the source was not necessarily one which was expected to be continuously productive, but one whose object was the production of a definite return, excluding anything in the nature of a mere windfall, and that " capital " in most cases was hardly more than an element in the process of production. We agree with this analysis of the Income-tax Act, and indeed, these observations were also applied in the Pursa Limited case, to which we have already referred. It thus follows that capital may, in the process of production, depreciate, get used up or lost. The Income-tax Act, while taxing income, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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