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PETITIONER: THE COMMISSIONER OF INCOME-TAX, BOMBAY CIRCLE II

       Vs.

RESPONDENT: THE NATIONAL SYNDICATE, BOMBAY.

DATE OF JUDGMENT: 01/11/1960

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. DAS, S.K. SHAH, J.C.

CITATION:  1961 AIR  398            1961 SCR  (2) 229  CITATOR INFO :  D          1965 SC  33  (6)  R          1971 SC2274  (7)

ACT: Income-Tax--Business   carried  out  for  a  part   of   the year--Computation--If  must  be for the  whole  year--Indian Income-Tax Act, 1922-(11 of 1922) s. 10(2)(Vii).

HEADNOTE: The  National Syndicate, a Bombay firm, acquired on  January 11,  1945, a tailoring business as a going concern  for  Rs. 89,321  which  included the consideration  paid  for  sewing machines  and  a motor lorry.  Soon after the  purchase  the respondent  found  it difficult to  continue  the  business, therefore  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 claimed  a deduction under s. 10(2)(Vii) of the Indian Income Tax  Act. The  Appellate Tribunal held that the sales of machines  and the motor lorry were made in the course of the winding up of the assessee’s business after the business had been  stopped and  that,  therefore, the deduction could  not  be  claimed under  s. 10(2)(Vii).  Respondent moved the High  Court  and obtained an order under s. 66(2) of the Income-Tax Act,  and the following two questions were referred :- "  (1) Whether the Tribunal was justified in law in  holding that  the petitioner had carried on its business  only  till twenty  eight day of August, One Thousand Nine  Hundred  and Forty Five ? (2)  Whether on the facts and circumstances of the case, the Income  Tax Appellate Tribunal was justified in law  in  not allowing  the sum of Rs. 41,998 (Rupees  forty-one  thousand nine  hundred and ninety eight) on sale of machines and  Rs. 3,700 (Rupees three thousand and seven hundred) on the  sale of  lorry  as  a  deduction from the  total  income  of  the applicant ?" The  High Court answered the first question in the  affirma- tive, and the second question in the negative.

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The Commissioner of Income-tax questioned the finding of the High  Court and came up in appeal by special leave and  con- tended  that an allowance could only be claimed if  sale  of machines,  etc.  took  place when  the  business  was  being continued and not if the business had come to a close.   The respondent  on the other hand submitted that  s.  10(2)(Vii) would be applicable 230 in  a  case where the business continued for a part  of  the account year, even though the sale of machinery, plant, etc. took  place  after the closure of the  business  during  the course of the account year. Held,  that  if  the profits or gains of a  business  for  a particular  year are to be taxed, they must be computed  for the  whole year taking into account losses  incurred  during the same year, provided that the business had been " carried on by the assessee " ; the building, machinery or plant  had been " used for the purpose of the business "; the sale etc. had taken place during the year of account, and the loss had been brought into the books of the assessee and written off. There  is  no other condition to be found expressly  in  the section  or  in  the Act.  It is  nowhere  stated  that  the business of the assessee should have been carried on for the whole year, or that the machinery or plant should have  been used  for the whole of the accounting period.  There are  no words which would show that, if the assessee worked only for a  part  of  the year and then sold out, the  loss  that  he incurred was not a business loss, or that he must pay tax on the small profit that he might have made, and bear the  loss in addition. The Liquidators of Pursa Limited v. Commissioner of  Income- Tax, Bihar, [1954] S.C.R. 767, Commissioner of Income-tax v. Express Newspapers Ltd. (1960) 40 I.T.R. 38, distinguished. Indian Iron & Steel Co., Ltd. v. Commissioner of  Incometax, Bengal, (1943) 11 I.T.R. 328, Commissioner of Income-tax  v. Shaw Wallace & Co., Ltd., (1932) L.R. 59 I.A. 206,  referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 280 of 1959. Appeal  by special leave from the judgment and  order  dated the  22nd August, 1956, of the former Bombay High  Court  in Income-tax Reference No. 17 of 1956. B.   Ganapathy Iyer and D. Gupta, for the Appellant. Sanat  P. Mehta, S. N. Andley, J. B.  Dadachanji,  Rameshwar Nath and P. L. Vohra, for the Respondent. 1960.  November 1. The Judgment of the Court’ was  delivered by HIDAYATULLAH J.-The Commissioner of Incometax, 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 231 under  s.  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

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Government  departments,  and  during the  war  years,  this appears  to  have been a profitable  business.   Immediately after  the respondent acquired this business, the  last  war came  to  an end, and the respondent found it  difficult  to continue  the business.  It, therefore, closed its  business in  August, 1945.  Between August 16, 1945 and February  14, 1946,  sewing  machines were sold at a loss of  Rs.  41,998. The motor lorry was also sold on February 14,1946, at a loss of  Rs. 3,700.  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 claimed  a deduction  of Rs. 45,698 under s. 10(2)(vii) of  the  Indian Income-tax  Act.   The Income-tax  Officer  disallowed  this deduction,  holding that the loss was of a  capital  nature, and that inasmuch as the business of the respondent was  not carried   on  after  August  1945  s.  10(2)(vii)  was   not applicable.   This order of assessment was confirmed by  the Appellate  Assistant  Commissioner, who also held  that  the loss represented capital loss, as the machines and the motor lorry  were  sold  after the closure of  the  business.   On appeal,  the Appellate Tribunal, Bombay, also confirmed  the order,  holding  that the sales of machines  and  the  motor lorry  were  made  in the course of the winding  up  of  the assessee’s business after the business had been stopped, and that, therefore, the deduction could not be claimed under s. 10(2Xvii). The respondent asked the Tribunal to refer the questions  of law arising from its order, but the request was refused.  It then moved the High Court, and 232 obtained an order under s. 66(2) of the Income-tax Act,  and the following two questions were referred: "  (1) Whether the Tribunal was justified in law in  holding that  the Petitioner had carried on its business  only  till twenty-eighth  day of August one thousand nine  hundred  and forty-five ? (2)  Whether on the facts and circumstances of the case, the Income-tax  Appellate Tribunal was justified in law  in  not allowing  the sum of Rs. 41,998 (Rupees  forty-one  thousand nine  hundred and ninety eight) on sale of machines and  Rs, 3,700 (Rupees three thousand and seven hundred) on the  sale of  lorry  as  a  deduction from the  total  income  of  the applicant?" The   High  Court  answered  the  first  question   in   the affirmative,  holding that there was evidence on  which  the Tribunal  could reach the conclusion that the business  had, in  fact, been continued only till August 28, 1945.  On  the second question, the High Court was of the opinion that  the business  having been carried on for at least a part of  the account  year,  s.  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 s. 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  re- open  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

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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 the Department and partly because,  in our  opinion,  there were adequate materials  for  the  High Court to have based its conclusion.  Inasmuch as we were  in agreement                             233 with the High Court on the question of the applicability  of s. 10(2)(vii), we also felt that no useful purpose would  be served  in  examining  the matter to find  out  whether  the business  had,  in fact, closed on August 28,  1945  or  had continued till the end of the account year. We   are   really  concerned  in  this   appeal   with   the interpretation of s. 10(2)(vii) and its applicability to the facts  of the case.  It may be assumed for the  purposes  of this  case  that the business did, in fact,  close  down  on August  28,1945, even though some in comings  and  outgoings were taking place for the rest of the year and the books  of account were not finally closed till February 28, 1946.  The Commissioner  contends  that  an  allowance  could  only  be claimed  if the sale of machines etc., took place  when  the business  was  being continued and not if the  business  had come to a close.  The respondent, on the other hand, submits that  s. 10(2)(vii) would be applicable in a case where  the business  continued  for a part of the  account  year,  even though  the  sale of the machinery, plant etc.,  took  place after  the closure of the business during the course of  the account year. Section 10(2)(vii) reads as follows: "  10(2).   Such profits or gains shall  be  computed  after making the following allowances, namely:- (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  that  such amount is actually written off  in  the books of the assessee:". The Commissioner emphasises the word " such " in the clause, and  states  that this takes us back to cl. (iv)  where  the words " used for the purposes of the business occur.  It is, therefore, contended that if the business itself comes to an end before the sale takes place, the sale is not during  the continuance of the 30 234 business but is during the course of the winding up ,of  the business, and the condition precedent to the application  of s.  10 is that the business must be is carried on "  by  the person  claiming  the benefit of sub-s. (2).   Reference  in this  context  is made to the first sub-section  of  s.  10, where  it is provided that the tax ’shall be payable  by  an assessee   under  the  head  "  Pro.  fits  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 The Liquidators of Pursa Limited v. Commissioner of Income-tax, Bihar (1).  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. (2). These two cases were decided under the second proviso to  s. 10(2)(vii) before its amendment in 1949.  The second proviso reads: " Provided further that where the amount for which any  such

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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  underlined above were inserted by s. 11  of  the Taxation  Laws  (Extension to Merged States  and  Amendment) Act, 1949. In  both the cases, the business had admittedly closed  down before  the sales took place, and it was held, applying  the proviso  as it was before the amendment of 1949,  that  such receipts were not taxable.  The amendment now renders  these cases  obsolete.   Reliance is, however, placed  on  certain observations  in these oases, and it is contended  that  the same  reasoning  must be applied to a case of loss as  to  a case  of  profits.  We shall, therefore,  refer  briefly  to them. In  The  Liquidators  of Pursa Limited  v.  Commissioner  of Income-tax, Bihar (1), the year of, assessment                             235 was  1945-46,  which corresponded to  the  accounting  year, October  1, 1943 to September 30, 1944.  Pursa Limited  were manufacturers  of sugar, and sold the business on August  9, 1943, including buildings, machinery and plant but excluding manufactured sugar worth about Rs. 6,00,000.  This sugar was sold till June, 1944; but throughout the accounting  period, the  machinery,  plant or buildings were  not  used.   Pursa Limited  went into voluntary liquidation on June  20,  1945. In the sale of the buildings, machinery and plant there  was an  excess, such as is described in the second proviso,  and that  amount  of excess was sought to be  taxed.   This  was negatived by this Court on two grounds.  They were (a): " 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 "; and (b)  "  that  the intention of the company was to discontinue its business and the  sale  of  the machinery and plant was  a  step  in  the process  of  winding up of its business.  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". Counsel   differ  as  to  the  ratio  of  the   case.    The Commissioner  contends  that  the ratio  is  that  no  sale, whether  at  a  loss, or at a profit can  be  said  to  fall within, respectively, cl. (vii) or the second proviso, if it takes  place  after the closure of business and  during  the process  of winding up, while the respondent  contends  that the  real  ratio  was  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 business by the Company and not a realisation of its assets with a view to winding up, the 236 machinery  or  plant not being used  during  the  accounting period 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

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to the sale of any 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  changed circumstances, but it is obvious  that  the case  is  distinguishable  on more  than  one  ground.   The proviso  is  in a language different from cl.  (vii),  as  a fiction is introduced and such ’ profits’ are taxed to  take back what had been given away for depreciation which did not really take place.  But more of it later. Express  Newspapers Ltd. case (1) is  also  distinguishable. In that case, the Free Press of India (Madras) Ltd. resolved on  August 31, 1946, to transfer the right of  printing  and publishing  its daily newspapers to Express Newspapers  Ltd. They  rented out their machinery, etc., to the new  Company, which  took  possession on September 1, 1946.  The  year  of account  ended  on December 31, 1946.  The Free  Press  went into  voluntary  liquidation  on October  31,  1946  and  on November  1,  1946, its building, machinery and  plant  were sold  to  the  new Company at a  price  which  exceeded  the written  down value by Rs. 6,08,666 made up of Rs.  2,14,090 being the excess of the original cost price over the written down  value,  and  Rs. 3,94,576 being the  excess  over  the original  cost  price.   One  question,  among  others,  was whether the second proviso to s. 10 (2)(vii). applied.   The Madras High Court ob. served : (1)  (1960) 40 I.T.R. 38.                             237 "......  in the present case the sale of the machinery  took place  during the year of account, and it was used  by  Free Press  Company for at least a part of the year.  This  would be sufficient to attract liability.. The learned counsel for the  assessee is on a firmer ground when he  contended  that the  sale  being made in the process of winding  up  of  the company  section  10(2)(vii)  will not  apply.   The  second proviso  to section 10(2)(vii) would be invoked  only  where the  sale was one made in the course of business carried  on by the predecessor.  Where the sale is a closing down  sale, that profit could not be brought to tax.  In Liquidators  of Pursa  Ltd. V.  Commissioner of Income-tax (1), the  Supreme Court  held that where in a case the sale of  machinery  and plant  was  a  step  in the process of  winding  up  of  its business,  the  intention  of the  company  having  been  to discontinue the business, such sale was not an operation  in furtherance  of the business carried on by the company,  but was  only  a  realisation of its assets in  the  process  of gradual   winding  up  of  its  business  which   eventually terminated in the voluntary liquidation of the company,  and provision  of  section 10(2)(vii) 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   s. 10(2Xvii).   Clause  (vii) deals with loss  and  the  second

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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 (1)  [1954] S.C.R. 767. 238 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  and  written  off, it can  be  claimed  as  a deduction.    Profit  in  business,  on  the   other   hand, primarily,  means profit earned in the business.  But if  an allowance  had  been claimed as depreciation  and  had  been allowed, and if the sale of the building, machinery or plant on  which  depreciation allowance was claimed in  the  past, shows  that  there  was, in fact,  no  depreciation  but  an accretion  in  value, the law deems that a profit  has  been made.   The  fiction  thus converts that which  may  not  be strictly  profit of the business in a narrow sense,  into  a profit  for  purposes  of assessment.  Formerly,  it  was  a matter of doubt whether even this accretion could be  deemed a  profit  when the business had closed down; but  now,  the legislature  has  amended  the  law  by  saying  that   this fictional profit must be brought to tax irrespective of  the fact  that the sale took place " during the  continuance  of the business or after the cessation thereof" But it is to be noticed  that  no such amendment was made in  cl.  (vii)  to exclude  loss over buildings, machinery or plant  after  the clospre  of  the  business.   It  is  thus  clear  that  the principles which govern the proviso cannot be 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. We must thus restrict ourselves to the scheme of the  Indian Income-tax  Act and the clause in question.  The  scheme  of the  Income-tax  Act, as was pointed out by Lord  Porter  in Indian Iron & Steel Co. Ltd. v. Commissioner of  Income-tax, Bengal (1), is that income. tax is assessed and paid in  the next  succeeding year upon the results of the  year  before. It  is the income of the previous year which is  brought  to tax  in  the succeeding year, which is called  the  year  of assessment.   For  the  purpose of  assessment,  the  Indian Income Tax Act divides the sources of income, profits (1)  [1943] 11 I.T.R. 328, 336.                             239 and  gains  into  six heads in s. 6. The fourth  head  is  " Profits  and  gains of business, profession or  vocation  ". Sections 7, 8, 9, 10, 12, 12A and 12B lay down’ the rules of computation under the different heads.  Profits and gains of business  are dealt with in s. 10.  The first subjection  of that section provides: " The tax shall be payable by an assessee under,, the head I Profits and gains of business....’ in respect of the  profit or gains of any business...... carried on by him." In  Commissioner of Income-tax v. Shaw Wallace &  Co.,  Ltd. (1),  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

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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  (2), 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, profits or gains, takes note of,  and  makes allowance for such eventualities. If the profits or gains of a business for a particular  year are  to be taxed, they must be computed for the  whole  year taking  into account losses incurred during the  same  year. Now,  the first condition precedent appears to be  that  the business must have been (1) (1932) L.R. 59 I.A. 206. (2) [1954] S.C.R. 767. 240 "  carried on by the assessee ". This is to be found in  the first  sub-section of s. 10.  The second condition  is  that the  building, machinery or plant must have been " used  for the purposes of the business ". This is to be found in  of. (iv)  of  the  second  sub-section  of  s.  10.   The  third condition  is  that the sale etc., should have  taken  place during the year of account.  This follows from the nature of the  tax which is assessed and levied on the profits of  the working of the previous year.  The fourth condition is  that the  loss  should have been brought into the  books  of  the assessee  and  written off.  This is provided by  the  first proviso.  There is no other condition to be found  expressly in the section or in the Act.  It is nowhere stated that the business of the assessee should have been carried on for the whole year, or that the machinery or plant should have  been used  for the whole of the accounting period.  There are  no words which would show that, if the assessee works only  for a  part  of the year and then sells out, the  loss  that  he incurs  is not a business loss, or that he must pay  tax  on the small profit that he might have made, and bear the  lose in  addition.  We have shown above that the case  of  profit referred  to  in the second proviso stands  on  a  different footing altogether, since profit and loss arise in different ways.    The   law  has  thus  treated  the   two   subjects differently, and the legislature has amended the proviso but not the clause. In  view of what we have said above, we are of opinion  that the  judgment  of  the High Court was  correct  in  all  the circumstances  of  this  case,  and  this  appeal  must   be dismissed with costs.                      Appeal dismissed. 241