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PETITIONER: THE LIQUIDATORS OF PURSA LIMITED

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BIHAR.

DATE OF JUDGMENT: 09/02/1954

BENCH: DAS, SUDHI RANJAN BENCH: DAS, SUDHI RANJAN MAHAJAN, MEHAR CHAND (CJ) HASAN, GHULAM JAGANNADHADAS, B.

CITATION:  1954 AIR  253            1954 SCR  767  CITATOR INFO :  E          1954 SC 470  (65)  D          1961 SC 398  (7,10,12,16)  R          1965 SC  33  (6)  F          1965 SC1358  (11,23)  RF         1969 SC 869  (5)  R          1971 SC 794  (12)

ACT:      Income-tax  Act  (XI  of  1922)  s. 10(2) (vii)  proviso  2--Any  such machinery or plant must have been used  in  the  accounting  year--Section  66--Finding  of fact--When appeal  court can intervene.

HEADNOTE:    The  fundamental  idea  underlying  the  words  used  in the  definition  of  "business" in s. 2(4)  of the   Income- tax   Act the continuous  exercise  of an activity  and  the same central idea is  implicit  in  the  words  "carried  on by  him"  occurring  in 10(1)  and  those   critical   words are  an  essential  constituent that which is to be  produce the taxable income, and therefore the 768 tax  is payable only in respect of the profits or  gains  of the business which is carried on by the assessee.  That   under  clause   (vii)  of s. 10(2)   the  machinery and plant must be such as were used at least  for a part  of the  accounting  year.  As the machinery  and plant  of  the sugar factory which were sold had not at all been  used  for the  purpose of  business during  the  accounting year,  the second   proviso  to   s.10.  (2)  (vii)  could    have   no application and the assessees were not  liable.  Although   the   High   Court  will not   disturb  or   go behind  a  finding  of fact of the Tribunal,   it   is  well settled  that  where it is competent for   a   Tribunal   to make   findings   of fact  which are excluded  from  review, the appeal court has  always jurisdiction to intervene if it appears  either  that  the Tribunal  has  misunderstood  the statutory  language because  the proper construction of  the statutory  language  is  a  matter   of  law  or  that   the Tribunal has made a finding for  which  there is no evidence

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or which is inconsistent with the evidence and contradictory of it.    Commissioner   of  Income  tax  v.  Shaw   Wallace   and Company  (L.R.  59 I.A. 206),   and  Commissioners  o/Inland Revenue v. Fraser (24 Tax Cases 498) referred to.

JUDGMENT:     CIVIL    APPELLATE   JURISDICTION:   Civil   Appeal  No. 33 of 1953.    Appeal   by special  leave from the  Judgment  and  Order dated  the 16th May,  1951, of the High Court of  Judicature at   Patna   in  Miscellaneous   Judicial  Case No.  126  of 1950,  arising  out  of the Order  dated   the  17th    May, 1949,     of     the    Income-tax     Appellate   Tribunal, Calcutta   Bench,  Calcutta, in I.T.A. No. 147 of 1948-49. sukumar   Mitra  (S.  N.  Mukherjee  with   him)   for   the appellant. C.K. Daphtary,. Solicitor-General for India (Porus A. Mehta, with him) for the respondent  1954. February 9. The Judgment  of the Court was  delivered by     DAS  J.--This  is an appeal by special  leave  from  the judgment  of the Patna High Court delivered on  a  reference made   by   the      Income-tax   Appellate Tribunal   under section 66(1)  of the Indian Income tax Act.     The  tribunal referred  the following two questions  for the opinion of the High Court: 769     1.  On  the  facts  and in the circumstances   of   this case  is  the  surplus  of Rs. 13,05,144 arising out of  the sale  of  the  plant  and machinery  of  the  sugar  factory chargeable under section 10 (2) (vii) ?     2.  Was  the  profit  of  Rs.  15,882  on  the  sale  of stores  of the factory taxable under the Income-tax  Act  in the circumstances of this case ?     The  reference  came up for hearing  before  a  Division Bench  consisting  of  Shearer  and  Sarjoo  Prasad  JJ. and after  a  prolonged  hearing  the learned  Judges  delivered separate   judgments  on  the27th  February. 1951,    giving divergent     answers    to  the   questions,   Shearer   J. answering  both  the  questions  in  the negative and Sarjoo Prasad  J. giving an affirmative answer  to both  of   them. The      matter  thereupon  was  placed   before   a   third Judge,     Ramaswami   J.   who,  after  a  fresh    hearing delivered   his  judgment  on the 16th May,  1951,  agreeing with Sarjoo Prasad J. on the first question and with Shearer J.  on  the  second question. The result was  that the  High Court   by  a  majority   decision   answered   the    first question  in the affirmative,  i.e., against  the  assessee, and  the  second question  in   the   negative,    i,e.   in favour   of  the assessee.       The  assessee applied to the High Court for  leave  to appeal to this  court against the High  Court’s decision  on the  first  question.  The  High Court  having  declined  to grant  the necessary certificate the  assessee  applied  for and  obtained   the  special  leave of  this       court  to prefer  the  present  appeal.  The  department     has  not preferred any  appeal against  the High Court’s decision  on the  second  question  and nothing  further  need   be  said about that question.     The  controversy arose in course of the proceedings  for the  assessment  of  Pursa  Ltd.   to  income-tax  for   the assessment   year 1945-46,  the  relevant  accounting   year

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covering  the  period  between  the  1st  October, 1943,  to 30th   September,   1944.  Pursa  Ltd.,  was  a      company incorporated in 1905 under the Indian Companies  Act but all its  shareholders  and directors  were    residents  in  the United  Kingdom. The business of the 770 company        was    that   of  growers    of    sugarcane, manufacturers     of  sugar  and dealers  in sugar.   It  is common  ground that the crushing season for the  manufacture of  sugar  is from December  to  April  of  each  year.   It appears  that towards  the end  of 1942 an attempt  was made to sell the entire business of the company but such  attempt did  not  succeed.  It  appears from  the case filed by  the respondent in tiffs appeal that in the middle  of 1943   the directors  of  the  company  commenced negotiations for  the sale  of the factory and other assets  of the  company  with the  ultimate   object of winding up the company.  From  the correspondence, affidavit and other materials placed  before the  tribunal  and referred to by Sarjoo Prasad  J.  in  his judgment  it   appears that on the 9th   August,   1943,  an inventory  was prepared and a firm offer was  received  from Dalmia  lain  &  Company  Ltd.,  for  the  purchase  of  the factory  and stores as on that date. This offer was  on  the 16th   August,   1943,   communicated   by  cable   to   the directors  in  England.  On  the  20th  August,   1943,  the directors, asked the local managers in India to proceed with the  matter   in  anticipation  of the   sanction   of   the shareholders  which the directors expected to obtain  at  an extraordinary   general  meeting  to be held very   shortly. That  meeting, however, was held on the 8th October,   1943, i.e., 8 days after the accounting year had started., At that meeting  the firm  offer of Dalmia lain & Company  Ltd.  was accepted  and  a  concluded  agreement for sale  came   into existence.   Thereafter   instructions  were  given  to  the solicitors to draw up the necessary documents.    On   the  7th  December, 1943, a  written  memorandum  of agreement   was  executed  whereby  the  company  agreed  to sell  and demise to Dalmia Jain & Company Ltd.,   free  from all  mortgages  and charges  at and for the price  of rupees twenty-eight   lacs  all  the  lands,  buildings,  machinery and  plant  and  all vats,  reservoirs,  cisterns,    pumps, machinery,     engines,    boilers,    plant,    implements, utensils,    tramways,   furniture,   stores,  articles  and things  as  on the ninth day of August,  one  thousand  nine hundred  and  forty-three  (subject  to  subsequent use  and consumption in the ordinary course 771 of  business)   used in connection  with   the   said  sugar factory,  but  excepting  stocks  of manufactured  sugar and stocks  of grain in godown on the ninth day of August,   one thousand  nine  hundred  and forty-three and all stores  and other articles  bought or received by the company after  the date.  Dalmia  Jain & Company Ltd., paid the sum  of  rupees twenty-eight lacs on the same day and on the 10th  December, 1943,  they  got possession of the factory. On the  date  of the  aforesaid sale,  the  company  possessed  sugar   stock valued   at  rupees  six lacs  which was excluded  from  the sale.  This  stock  of sugar the company continued to   sell up to June, 1944. It is said that the said  stock  of  sugar was  excluded  because  at the time it  was not possible  to know  at  what date such a sale would be concluded  and  the sugar  produced  in 1943 had to be sold by and  through  the exclusive  selling  agents of the company under  a  contract entered  into with them. It is, however, not  disputed  that between  the  9th  August, 1943, when  the  firm  offer  was

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obtained and the 10th December, 1943, when possession of the factory was made over to Dalmia  Jain & Company  Ltd.,   the company  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.  Indeed, throughout  the  accounting period the machinery  and  plant were not used by the company.     The   company   went  into  voluntary    liquidation  on the  20th   June,   1945.  The  reason  for  the   delay  in putting  the company into liquidation is said to  have  been caused by considerable legal difficulties with regard to the transfer   of   certain  mokarari  lands  belonging  to  the company.  The  liquidators  appointed  by the   shareholders of  the  company  represented the  company  in   the  matter of  proceedings  for     assessment   of the company for the assessment year 1945-46.       In  the  course of these  assessment proceedings   the Income-tax   Officer on  the  21st February, 1947,  wrote  a letter  to  the   liquidators   asking  for  elucidation  on certain  points.   Amongst  other  things,  the  Income  tax Officer wanted to know  the   liquidators’  objection    why the  company’s activities     during  the   previous 772 year  might not be treated as amounting to a realisation  of assets on impending liquidation rather than to the  carrying on  of business within the meaning of  the  Income-tax  Act. To this  letter an  answer was sent  by the liquidators . on the  19th March, 1947, pointing out that  the  company   had gone  into  liquidation on the 20th June, 1945, and that  in view  of the date of liquidation the liquidators  could  not agree  that  the company  was  not  carrying   on   business during   the year  ended  30th  September,  1944,  and  they further  pointed out  that  the  various  debits   contained in  the  sugar  factory  accounts  were  those  incurred  in carrying on the company’s  business.  By his  letter   dated the  17th   May,  1947,  the  Income-tax   Officer   claimed that large profits which had been made by the company on the sale  of  their machinery and plant were taxable  under  the second proviso to section 10 (2)(vii)of the Income-tax   Act and   called  upon  the  liquidators  to  retain  sufficient funds  and  assets in their hands to meet  the   heavy   tax liabilities   that  might  eventually arise  and   also   to warn  the  shareholders   accordingly.  He  also  asked  for certain  information which, however, the   liquidators   did not   furnish.  The  liquidators,  in their letter in  reply dated  the  22nd May, 1947, did not agree that  the  profits were taxable, for the profits to which  reference had   been made were  not   profits arising  from a  business   carried on  by   the   company but were  profits  arising  from  the company  ceasing  to carry on   business.   The   Income-tax Officer,   however, by his  order  dated  the   21st   June, 1947,  held  that the  profits  of  the  sale  of  machinery and   plant  were  liable to  assessment  under  section  10 (2)(vii)of  the   Act  and  added  a sum  of  Rs.  13,05,144 to  the profits.   The  Appellate   Assistant   Commissioner  of   Income-tax having   dismissed  the  liquidators’  appeal  on  the  30th January,  1947, the liquidators went up on further appeal to the  Income-tax Appellate Tribunal.  By its order dated  the 17th   May,  1949,  the  tribunal  dismissed  that   appeal. Upon   an application  under  section 66(1) of the  Act  the tribunal stated a case to the High Court referring the  two. questions herein before 773 set  out.   The  subsequent  history  of  the   matter   has

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already  been  mentioned  and  needs  no  reiteration.   The relevant  portion of section  10 of the Income-tax  Act   as amended  by  Act  VI  of  1939was  as follows :--    "10  (1) The tax shall be  payable  by  anassessee  under the   head "Profits  and gains  of business,  profession  or vocation"   in  respect  of the profits  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 :- (i)  ........................................ (ii)  ........................................ (iii)  ........................................     (iv)  in respect of insurance against risk of damage  or destruction  of buildings,  machinery,  plaint,   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;     (vi)  in  respect of depreciation  of   such  buildings, machinery,  plant,  or furniture being the property  of  the assessee,   a  sum equivalent  to such  percentage   on  the original cost thereof to the assessee as may in any case  or class of cases be prescribed: (vii)  in respect  of any machinery or plant which has  been sold  or  discarded, the  amount by which the  written  down value  of  the machinery or plant exceeds the.  amount   for which   the  machinery  or  plant  is actually sold  or  its scrap  value:    Provided     that     such     amount     is     actually written    off in the books of the assessee:   Provided   further  that where     the  amount  for  which any  such machinery  or  plant is  sold  exceeds the written down  value,  the  excess  shall be deemed to be profits  of the previous year in which the sale took place;                ............................................               ............................................." 774     It is necessary to bear in mind the  meaning  and import of  the provisions of section 10 (2)(vii)in so far  as  they apply to the present case.     Under  section  10  tax is payable by  an  assessee  "in respect  of  the  profits   or   gains   of  any   business, profession  or vocation  carried  on  by  him."   "Business" is   defined by section 2,  sub-section (4)   as  "including any  trade,  commerce or manufacture, or  any  adventure  or concern    in   the   nature   of   trade,    commerce    or manufacture."  As pointed  out by  the  Judicial   Committee in   Shaw  Wallace &  Co.’s  case(1)  the  fundamental  idea underlying       each  of  these  words  is  the  continuous exercise  of     an  activity  and  the  same central   idea is   implicit  in the  words "carried on by him"   occurring in   section   10  (1)and   those   critical  words  are  an essential  constituent  of  that which is  to  produce   the taxable  income.  Therefore,  it  is  clear that the tax  is payable  only  in respect of the profits or  gains   of  the business which is  carried on by  the assessee.  Sub-section (2)permits    allowances    to    be   made   before     the taxable  profits   are  ascertained.  Proviso  (2)to  clause (vii)   of   that  sub-section  on   which  the   income-tax authorities   have   relied   makes   the  excess   of  sale proceeds   over  the  written   down  value  of  "any   such machinery  or  plant"  to  be  deemed  to be profits of  the previous  year  in  which the sale  took  place.   Any  such machinery   or   plant  in  the  proviso clearly  refers  to

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the  machinery or plant in respect of which the allowance is to  be given under that  clause. Although  the  word  "such" was  not  used in the body of clause  (vii), the  scheme  of sub-section  (2)  which  is apparent from the other  clauses of  allowances e.g., (iv), (v) and (vi),  clearly  indicates that  the  machinery or plant referred to in  clause   (vii) must  be  the  same as those  mentioned   in   the   earlier clauses,   i.e., such machinery or plant as were  "used  for the  purposes of the  business,  profession  or   vacation." Indeed,   the  position  has been  made   clear  and  placed beyond any doubt  by the  subsequent amendment of 1946 which added  the word  "such"    in clause  (vii). The  words"used for  the  purposes  of  the  business"  obviously [1] L. R, 59 I.A. 206 at p. 213. 775 mean  used for the purpose  of enabling  the  owner to carry on the business and earn profits  in the business. In  other words,  the machinery or plant must be used for the  purpose of  that business which is actually   carried  on  and   the profits  of which  are  assessable under section 10 (1). The word   "used" has been read in some of the pool cases  in  a wide  sense  so  as to include  a   passive   as   well   as active  user.  It is not necessary,  for  the  purposes   of the  present  appeal,  to  express  any  opinion   on   that point    on   which  the  High   Courts    have    expressed different   views.  It  is, however,  clear  that  in  order to  attract the  operation clauses (v), (vi) and  (vii)  the machinery  and plant must be such as were used, in  whatever sense  that  word is taken,  at least for a  part   of   the accounting  year. 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 them  and  the  second  proviso also  does   not  come  into operation.    In  its  statement of the case, after  referring  to  its decision that the profits on the sale of machinery and plant were  assessable  under section  10 (2)(vii),  the  tribunal proceeded to state:    "This   decision   was  based   on  two   considerations. First,  that  as  admitted  by  the  applicant  company  the company  had  been carrying on its business up to the   date of   the  sale  of  the  machinery,  namely,  7th  December, 1943.  ’The  tribunal  was  of the  opinion  that   as   the applicant   company   had   not  ceased   to  carry  on  its business  till the date  of the  sale  of the machinery,  it must   be  held  that  the  sale  of the ’machinery  was   a part   of  the   applicant  company’s carrying  on   of  the business.   The   second   reason for the  decision  of  the tribunal was  that the  applicant company did not  sell  its sugar   stocks   amounting  to over   Rs.6,00,000,  on   7th December,   1943.    The applicant company s plea  that  the sugar   stocks  could not be sold as the  applicant  company had  sole agents for the sale of sugar, was not accepted  by the  tribunal.  The’ Income-tax Appellate   Tribunal   found that sugar continued  to  be  sold  for more than 6 months  776 after  the  sale   of   the   machinery   and    substantial expenses    on    establishment    and    general    charges continued   to  be  incurred.  From  this   the   Income-tax Appellate   Tribunal   concluded  that  the   sugar   stocks had  not   been sold on  7th  December;  1943, purposely  in order  to  sell these  to  the best  advantage   later   on. This,  the Income-tax Appellate Tribunal held,  showed  that the   applicant company carried on business even  subsequent to   the  sate  of  machinery  on  ’7th   December,   1943."

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       Although  the  High  Court will not  disturb  or  go behind  the  finding of fact of the tribunal, it is now well settled  that where it is competent  for a  tribunal to make findings  in  fact  which are  excluded  from  review,   the appeal  court  has  always  jurisdiction  to intervene if it appears either  that  the tribunal  has misunderstood    the statutory   language--because  the proper  construction   of the  statutory  language  is  a matter of  law--or that  the tribunal   has  made   a   finding for  which  there  is  no evidence  or which  is inconsistent  with the evidence   and contradictory  of it.  [See Lord Normand in Commissioners of Inland Revenue v. Fraser(1)].  It appears  to us  that   the tribunal   misdirected itself in law as to the  meaning  and import  of the  relevant  provisions  of  section 10 of  the Act.   ]t  completely   overlooked   the   fact  which    is plainly   in evidence  on the record  that   the   machinery and  plant which were sold had not at all been used for  the purposes  of the business carried on in the accounting  year and consequently the second proviso to section 10 (2)  (vii) could  have  no application to the sale  proceeds  of   such machinery   and  plant.  In  fact  the  entire  decision  of the tribunal was vitiated by its failure to keep in view the true  meaning and scope of section 10 (2) (vii) and  cannot, therefore, be supported.     It  further appears to us that in the statement  of  the case  the tribunal was not merely stating something  in  the nature  of a primary fact but was also drawing a  conclusion which  is  to  a  certain extent  contrary  to  the  primary finding. As is stated clearly in the statement of the  case, the decision of the tribunal was based  on (1) 24 Tax Cas. 498 at p. 501. 777 two   considerations.  The first consideration  was  rounded on   an  admission  by  the  liquidators  that  the  company had been carrying on its business up to the date of the sale of the machinery on the 7th December, 1943.  This  admission is quite consistent with the case that the company was  only selling  its  stock of sugar and not doing any  business  of manufacture of sugar.  Indeed,  the  manufacturing   process does   not  begin  until  December  of  each  year  and  the memorandum of agreement was made on the 7th December,  1943, and possession  was delivered  to the  purchaser on the 10th December,  1943.  It is nobody’s case and it  has  not  been found that the company had manufactured any sugar during the whole of the accounting year. Therefore, this finding   that the company carried on its business up to the 7th  December, 1943, certainly does not indicate that the company was  also carrying   on   any  business  of  ’growing   sugarcane   or manufacturing sugar by the use of the machinery or plant  in question.  The  second finding that the company  carried  on business even after the sale of the machinery and the  plant clearly indicates that that business had nothing to do  with the  machinery or plant. Both the findings, therefore,   are inconclusive.  The matter,  however, does not rest there. It appears to us that the findings of fact,  taken   literally, cannot   support   the  decision of the tribunal.   If,   as held   by the tribunal,  "the  sale of the machinery  was  a part  of  the  applicant company’s   carrying   on  of   the business"   then  the  sale must be regarded as an  ordinary operation of such business  and  consequently  the   profits arising  out  of such ordinary business operation  would  be assessable  under  the provisions of section 10 (1)  and  it would  not be necessary to have recourse  to  the  statutory fiction  created by the second proviso to clause  (vii)under which the excess of the sale proceeds over the written  down

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value is to be deemed to be profits of the business. If  the profits  on the sale of the machinery and plant are   to  be made  assessable under the  second  proviso,  as  has’  been done by the  tribunal,  then it must be conceded that  these deemed  profits   were  not in reality the  profits  of  the business carried on by the (2) 24 Tax Cases 498 at p. 501. 13--95 S. C.I./59 778 company   and,   therefore,  the  sale   transaction   which brought   in   these  profits was not in fact  part  of  the company’s   business,   which  conclusion   again   will  be inconsistent  with the  finding  of fact if the business  is not understood  as limited only to the selling  of sugar.     For  reasons stated above, it appears to us that  having misdirected  itself in law  as to the  scope and  effect  of the relevant portions  of section 10 of the Act the tribunal did not approach the facts from a proper angle and, further, that  its  findings cannot, in the  circumstances   of  this case,   be given  such sanctity  as would exclude  the  same from review by the High Court  or  this  court.  Turning  to the   facts   to be gathered from the records  it  is  quite clear   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 the 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.   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 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.  In this     view  of the matter, the  answer   to   the   first question    should  be  in  the  negative  and   we   answer accordingly.     The  result  is  that this appeal  is  allowed  and  the respondent  shall pay the costs  of the appellants  both  in this court and in the High Court.                        Appeal   allowed. Agent for the  appellant:B. N. Ghose. Agent for the respondent: G.H. Rajadhyaksha. 779