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PETITIONER: COMMISSIONER OF INCOME-TAX, MADRAS

       Vs.

RESPONDENT: EXPRESS NEWSPAPERS LTD., MADRAS

DATE OF JUDGMENT: 07/05/1964

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1965 AIR   33            1964 SCR  (8) 188  CITATOR INFO :  RF         1965 SC 568  (14)  F          1965 SC1358  (11,14,16)  D          1966 SC  47  (7)  APR        1967 SC 193  (3,18)  R          1968 SC   9  (16)  RF         1969 SC 869  (4)  R          1975 SC2299  (6333)  R          1978 SC1099  (5,7)

ACT: Income-tax-Sale of machinery after close of  business-Amount in  excess  received over written down value  and  over  the original  cost  price of  machinery-Whether  taxable-Whether successor liable to be assessed on capital  gains-Income-tax Act,  1922 (11 of 1922), ss. 10(2) (vii) second proviso,  s. 26(2) and proviso.

HEADNOTE: The  Free  Press  Company  was  a  private  limited  company Carrying  On business as printers and publishers of  certain newspapers.   On  August 31, 1946, the  Free  Press  Company transferred the right to print and publish the newspapers to the assessee company and let out its machinery and assets to the latter with effect from September 1, 1946.  The assessee company  accordingly  started  publishing  newspapers   from September  1,  1946.   The  Free  Press  Company  went  into voluntary   liquidation  on  October  31,  1946,   and   the Liquidator,  on November 1, 1946, confirmed the transfer  of the  assets made by the Free Press Company to the  assessee- company.   On November 1, 1946 the aforesaid  machinery  was sold  yielding a profit of Rs. 6,08,666.  That sum was  made up  of, of price machinery Rs. 2,14,090, (ii) the amount  in excess  over  the  original  cost  priceRs.  3,94,576.    In assessing the assessee to income-tax for the accounting year 1946-47  the Income-tax Officer included the said two  items in the total income of the assessee-company.  The first item was assessed as profit under proviso to s. 10(2)(vii) of the Incometax  Act and the second item was assessed  as  capital gains.   The  matter  went  up to  the  High  Court.   On  a reference  the  High Court held that the  assessee  was  not liable to tax in respect of the said two items.

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Held:     (i) The second proviso to s. 10(2)(vii) of the Act would  only  apply to the sale of such machinery  which  was used for the purpose of business during the accounting year. In  order  to bring the sale proceeds to  charge  under  the second proviso the following conditions shall be  fulfilled: (1)  During  the entire previous year or a part  of  it  the business shall have been carried on by the assessee; (2) the machinery shall have been used in the business; and (3)  the machinery  shall have been sold when the business was  being carried  on  and not for the purpose of closing it  down  or winding  it up.  On the facts of this case it was held  that the  sale of the machinery in the instant case having  taken place  after the business was closed and during the  winding up proceedings therefore it would fall outside the scope  of the said proviso and thus the first item i.e. the sum of Rs. 2,14,090 could not be assessed to income-tax. 190 The Liquidators of Pursa Limited v. Commissioner of  Income- tax,   Bihar,  [1954]  S.C.R.  767  and  K.  M.  S.   Reddy, Commissioner  of Income-tax, Kerala v. West Coast  Chemicals and Industries Ltd. (in liquidation), Alleppy, [1962]  Supp. 3 S.C.R. 960, relied on. Commissioner of Income-tax, Bombay Circle II v. The National Syndicate, Bombay, [1961] 2 S.C.R. 229, explained. (ii) Both the sub-s. (2) of s. 26 and the proviso deal  only with  profits under the 4th head mentioned in s. 6  and,  so construed, it excludes capital gains.  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.  Therefore under s. 26(2) of the Act the  assessee  being the successor could not  be  liable  to income-tax-in  respect  of Rs. 3,94,576  (the  second  item) which  represented the capital gains because  capital  gains are excluded from the purview of s. 26(2) of the Act. United  Commercial Bank Ltd. v. Commissioner of  Income-tax, -West Bengal, [1958] S.C.R. 79, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 596 of 1963. Appeal  from the judgment dated March 1, 1960 of the  Madras High Court in Case Referred No. 11 of 1955. K.   N.  Rajagopal  Sastri  and  R.  N.  Sachthey,  for  the appellant. R.   Ganapathy   Iyer   and  R.  Gopalakrishnan,   for   the respondent. May 7, 1964 The Judgment of the Court was delivered by SUBBA  RAO,  J.-This appeal by special  leave  is  preferred against  the order of the Madras High Court in  a  reference made  to  it by the Income-tax Appellate Tribunal  under  S. 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 191 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

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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 authorizing 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  ...  Rs. 3,94,576/-.   The Income-tax Officer included the  said  two items in the total income of the assessee company under  the following  heads,  (i)  profit under  proviso  to  s.  10(2) (vii)  .... Rs. 2,14,090/-, and (ii) capital gains under  s. 12B  ....  Rs. 3,94,576/-, and assessed each  to  tax.   The Income-tax  Appellate  Tribunal upheld the validity  of  the inclusion  of  the  item under capital gains  in  the  total income of the assessee but decided against the inclusion  of the  first  item.   The  Appellate  Tribunal  referred   the following  two questions, among others, for the decision  of the  High  Court of Madras under s. 66(1) of  the  Incometax Act:-               "4. Whether Free Press Company made a business               profit  of  Rs. 2,14,090/-  under  proviso  to               section 10(2);(vii) of the Act?"               192               "6. Whether the capital gain made by the  Free               Press Company is liable to be assessed in  the               hands  of the Express Company,  under  section               26(2) of the Act?" The  reference  was heard by a Division Bench  of  the  High Court, consisting of Rajagopalan and Ramachandra Iyer,  JJ., who  by  their judgment answered the two  questions  in  the negative and against the department.  The present appeal  is preferred against the said judgment of the High Court. The  argument  in the appeal proceeded on the basis  of  the following  facts.   During the accounting year  1946-47  the Free  Press Company did not do the business of printing  and publishing newspapers from September 1, 1946, and thereafter the   assessee-company  alone  was  carrying  on  the   said business.   The  Free  Press  Company  went  into  voluntary liquidation  on  October 31, 1946, 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. 6,08,666/- 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

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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 s. 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 s.  26(2) of the Act. Learned  counsel for the respondent contended  that  neither the  conditions  laid down in s. 10(2)(vii) of the  Act  nor those  laid down in s. 26(2) thereof attracted the said  two items of income and, therefore, they were not assessable  in the hands of the assessee-company.                             193 The first question turns upon the relevant provisions of  s. 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.               Section 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  profit  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:-               (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 of any premium paid:               (v)   in  respect of current repairs  to  such               buildings, machinery, plant or furniture,  the               amount paid on account thereof;               (vii) in   respect  of  any   such   building,               machinery  or  plant which has  been  sold  or               discarded  or  demolished  or  destroyed,  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 or its scrap value:               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  51               S.C.-13               194               down  value shall be deemed to be  profits  of               the  previous  year  in which  the  sale  took               place: We  are concerned with the second proviso to s. 10(2)  (vii) of  the  Act.   The substantive clause  grants  a  balancing allowance  in respect of building, machinery or plant  which has been sold or discarded or demolished or destroyed.   The allowance  represents the excess of the written  down  value over  the sale price.  Under the proviso, if the sale  price exceeds  the  written-down value, but does  not  exceed  the original  cost  price, the difference between  the  original cost  and  the  written down value shall  be  deemed  to  be profits of the year previous to that in which the sale takes place;  that  is to say, the difference  between  the  price fetched at the sale and the written down value is deemed  to

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be the escaped profits for which 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 provi- sions.   Under s. 3 of the Act income-tax shall  be  charged for  any year in accordance with and subject to  the  provi- sions  of  the  Act in respect of the total  income  of  the previous  year  of every assessee; under s. 6,  one  of  the heads  of taxable income is "profits and gains of  business, profession or vocationl,; under s. 10(1), the tax under that head  is  payable  in  respect of profit  or  gains  of  any business  carried on by the assessee during  the  accounting year.  The                             195 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 profit  or  gains  of  any business  etc.  carried  on  by  him.   The  crucial   words are-."business  carried on by him".  If the profit 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 s. 10(1).  For instance,  if  the machinery  sold  after the business was closed or  when  the business was under liquidation, it would not be  appropriate to hold that the profit or gains earned by the sale were  in respect  of  the business that was being carried on  by  the assessee.   The  second condition that attracts  the  second proviso  is  implicit  in  the  adjective  "such"  preceding "building,  machinery or plant" sold.  The adjective  "such" refers  back to cls. (iv), (v), (vi) and (vii) of s.  10(2). Under  cl.  (iv) an allowance is allowed in  regard  to  any premium paid in respect of insurance against risk of  damage or destruction of buildings, machinery, plant etc. used  for the purpose of the business, profession or vocation.   Under this  clause  allowance is allowed only in  respect  of  the machinery  used  for the purpose of the  business.   Clauses (v),  (vi)  and (vii) refer to  such  buildings,  machinery, plant  etc.;  that is to say,  such  buildings,  _machinery, plant etc. used for the purpose of the business.  The result is  that the second proviso will only apply to the  sale  of such  machinery  which  was  used for  the  purpose  of  the business during the accounting year.  It brings in to charge the   escaped  profits  under  the  guise   of   superfluous allowances  if the machinery sold was used for the  business during  the  accounting  year when the  business  was  being carried on.  Therefore, to bring the sale proceeds to charge the  following condition.,, shall be fulfilled:  (1)  During the entire previous year or a part of it the business  shall have  been  carried on by the assessee;  (2)  the  machinery shall have been used in the business; and (3) the  machinery shall have been sold when the business was being carried  on and not for the purpose of closing it down or winding it up. If  these were the conditions for the applicability  of  the

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said proviso, the sale of the machinery in the instant  case having taken place after the business was closed and  during the winding up 196 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   The Liquidators  of Pursa Limited v. Commissioner of  Incometax, Bihar(1).   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 for 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 s. 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 year, s. 10(2)(vii) could have no application to the sale of any  such  machinery  or plant".  Learned  counsel  for  the Revenue  contends that the main reason for the decision  was that  the  machinery  or  the plant  was  not  used  in  the accounting year for the business and that the second reason, namely, that the assets were sold in the process of  gradual winding up of the com- 197 pany  was only an observation and that the decision was  not based  upon the said observation.  But a careful perusal  of the judgment discloses beyond any reasonable doubt that  the decision was based upon both the grounds.  As in the present case  the machinery was sold not for the business  but  only for  closing it up during the liquidation proceedings,  this decision  directly covers the present case.   This  question again   fell  to  be  considered  by  this  Court   in   The Commissioner of Income-tax, Bombay Circle II v. The National Syndicate,  Bombay(1).   There, the  National  Syndicate,  a Bombay  firm,  acquired  on January 11,  1945,  a  tailoring business   as   a  going  concern  for   Rs.   89,321/-which includedthe consideration paid for sewing machines and a motor lorry.   Soon  after the purchase the  respondent  found  it difficult to continue the business, and therefore it  closed its business in August, 1945.  Between August 16, 1945,  and February 14, 1946, sewing machines and the motor lorry  were sold at a loss.  The respondent closed its account books  on February  28, 1946, showing the two losses and writing  them off.   For  the  assessment  year  1946-47,  the  respondent

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claimed a deduction under s. 10 (2)     (vii) of the  Indian Income-tax Act.  The question fell to  be  considered  on  a construction of the provisions of s.    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 The Liquidators of Pursa Limited v. Commissioner of  Income- tax,  Bihar (2), and the amendment introduced in the  second proviso to s.  10 (2) (vii) of the Act, observed:               "But  it  is  to  be  noticed  that  no   such               amendment  was  made in el. (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               (1) [1961] 2 S.C.R. 229               (2) [1954] S.C.R. 767               199               used to govern the main clause, because profit               or  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 Limited(1).  It is said that the  con- dition that the sale of the machinery at a loss should  have been  before the closing of the business is  impliedly  laid down  by  s. 10(1) of the Act which applies equally  to  cl. (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 cl. (vii) of s. 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 cl. (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 cl. (vii).  When this  Court  expressly confined  the scope of the decision to the substantive  part of  cl.  (vii)  without  disturbing  the  validity  of   the decisions  governing  the second proviso, it is  not  proper that  we  should  rely upon it in  preference  to  a  direct decision  on the second proviso to cl. (vii) of s. 10(2)  of the  Act  before  it was amended.  This Court in  K.  M.  S. Reddy, Commissioner of Income-tax, Kerala v. The West  Coast Chemicals  and Industries Ltd. (in liquidation),  Alleppy(2) held  that  a  winding  up sale was  not  trading  or  doing business.   There.  chemicals and other  raw-materials  were sold  not  in  the course of ordinary trading  but  only  in realisation sale after the company had been wound up.   This Court,   speaking  through  Hidayatullah,  J.,   posed   the following question,               "The question, therefore, is whether there can               be said to be a sale in the carrying on of the               business in respect of the chemicals and other               raw materials."               (1)  [1954] S.C.R. 767                (2) [1962] Supp. 3 S.C.R. 960, 965.               199 After  referring to the passages in Halsbury’s Laws of  Eng-

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land, 3rd Edn., Vol. 20, pp. 115-117, wherein it was  stated that  "mere realisation of assets is not trading"  and  that there  was  distinction between sales forming  part  of  the trading  activities and those where the realisation was  not an act of trading, the learned Judge observed that the  said distinction  was  a  sound one.  The  learned  Judge,  on  a consideration  of other decisions, also accepted as  correct the  distinction made between a sale of the entire stock  as part  of  trading and the sale of a part of the stock  as  a winding  up  sale.   Then  the  learned  Judge  applied  the principles to the facts of the case and held that it was im- possible 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 cl. (vii) of s. 10(2) of the Act, but the principle accepted therein is the basis for the application of s. 10 of the Act and  that will apply to all provisions of s. 10,  unless  an exception is made in a particular provision.  For the  fore- going  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 Company wag 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 s. 26(2) of the Act.  To appreciate the contention some of the relevant provisions of the Act may be read:               Section 6.-Save as otherwise provided by  this               Act,  the following heads of  income,  profits                             and               200               gains,  shall be chargeable to  income-tax  in               the manner hereinafter appearing, namely:-               (v)   Profits    and   gains   of    business,               profession or vocation.               (vi)  Capital gains.               Section 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  profit  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:-               Section  12B.-(1) The tax shall be payable  by               an assessee under the head "Capital gains"  in               respect  of any profits or gains arising  from               the sale, exchange, relinquishment or transfer               of a capital asset effected after the 31st day               of  March,  1956, and such profits  and  gains               shall  be deemed to be income of the  previous               year    in   which   the    sale,    exchange,               relinquishment or transfer took place:               Section 24.-(2A) Notwithstanding anything con-               tained  in  sub-section (1), ",here  the  loss

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             sustained  is  a loss falling under  the  head               "Capital  gains," such loss shall not  be  set               off  except  against  any  profits  and  gains               falling under that head.               (2B) Where an assessee sustains a loss such as               is  referred  to in sub-section (2A)  and  the               loss  cannot be wholly set off  in  accordance               with  the provisions of that sub-section,  the               portion  not  so  set  off  shall  be  carried               forward to the                                    201               following  year  and set off  against  capital               gains  for that year, and if it cannot  be  so               set  off,  the amount thereof not so  set  off               shall be carried forward to the following year               and so on, so however that no such loss  shall               be carried forward for more than eight years:               Provided  that where the loss sustained by  an               assessee, not being a company, in any previous               year does not exceed five thousand rupees,  it               shall not be carried forward.               Section 26.-(2) Where a person carrying on any               business,  profession  or  vocation  has  been               succeeded in such capacity by another  person,               such person and such other person shall,  sub-               ject  to the provisions of sub-section (4)  of               section 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  clearcut scheme.   Though  income-tax is only one tax levied  on  the total  income,  s.  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- 202 tax, West Bengal(1) laid down that ss. 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 s.  6 is  a composite concept which takes in all the six heads  of income  mentioned  therein.  The 4th head  is  "profits  and gains of business, profession or vocation" and the 6th  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 s.  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

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of the accounting year.  Section 26(2) indicates the  manner of  assessment  of  the income, profits  and  gains  of  any business,  profession  or vocation.  This section  does  not provide  for the assessment of income under any other  head. It  only  says  that if there is a succession  to  a  person carrying  on business during an accounting year, the  person succeeded  and  the person succeeding can each  of  them  be assessed in respect of his actual share.  The proviso  deals with  a case where the person succeeded cannot be found;  in that  event,  the assessment of the profits of the  year  in which  the  succession  took  place upto  the  date  of  the succession  and  for the year preceding that year  shall  be made  on  the person succeeding him.  If an  assessment  has already been made in respect of the said years on the person succeeded,  it can be recovered from the person  succeeding. But  both sub-s. (2) and the proviso deal only with  income, profits and gains of ’the business, that is to say, for  the assessment made in respect of profit and gains under the 4th head of s. 6. Now turning to s. 12B, it provides for capital gains.   Under that section the tax shall be payable by  the assessee  under  the head capital gains in  respect  of  any profits  or gains arising from, the sale of a capital  asset effected during the Prescribed period.  It says further that such  profits  or gain shall be deemed to be income  of  the previous  year  in  which the sale etc.  took  place.   This deeming clause does not lift the, capital gains from the 6th head in s. 6 and place it (1) [1958] S.C.R 79             (4)  [1957] 32 I.T R. 688. 203 under  the 4th head.. It only introduces a limited  fiction, named that capital gains accrued will be deemed to be income of  the previous year in which the sale was  effected.   The fiction  does  not  make them the profit  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 s. 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 business cannot make them the profit of the business.  They are only  deemed to  be  income of the previous year and not  the  profit  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 if s. 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  s.  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

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the  proviso  makes it clear that the  income,  profits  and gains in sub-s. (2) of s. 26 only refer to the profits under the   4th  head  in  s.  6.  On  the  other  hand,  if   the interpretation 204 sought to be put upon the expression "income" in sub-s.  (2) of  s.  26 by the Revenue is accepted, then the  absence  of that  word  in the proviso destroys the argument.   But  the more  reasonable view is that both the sub-section  and  the proviso  deal only with the profits under the 4th head  men- tioned in s. 6 and, so construed, it excludes capital gains. The argument that sub-s. (2) of s. 26 read with the  proviso thereto  indicates  that  the total  income  of  the  person succeeded  is  the criterion for separate  assessment  under sub-s.  (2)  and for assessment and  realisation  under  the proviso is on the assumption that sub-s. (2) and the proviso deal  with all the heads mentioned in s. 6 of the Act.   But if,  as  we have held, the scope of sub-s. (2) of s.  26  is only  limited  to the income from, the business,  the  share under  sub-s. (2) and the assessment and  realisation  under the proviso can only relate to the income from the business. The argument is really begging the question itself.  In  the result we agree with the High Court in regard to the  answer it has given in respect of the second question. In this view no other question arises for our consideration. In the result, the appeal fails and is dismissed with costs. Appeal dismissed.