the Commissioner of Income-Tax, Bombay Circle Ii v. the National Syndicate, Bombay.

Judgment

THE COMMISSIONER OF INCOME-TAX, BOMBAY CIRCLE II THE NATIONAL SYNDICATE, BOMBAY. (S. K. DAs, M. HrnAYATULL.AH and J. C. SHAH, JJ.) Income- ~·ax-Business carried out for a part of the year-Computation-If must be for the whole year-Indian Income-Tax Act, 1922 (II of 1922) s. 10(2)(vii). The National Syndicate, a Bombay firm, acquired on January 'n, 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 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 claimed a deduction under s. l0(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 asse·ssee's business after the business had been stopped and that, therefore, the deduction could not be claimed under s. ro(2)(vii). Respondent moved the High Court and obtained an order under s. 66(2) of the Income-Tax Aet, and the following two questions were referred:- " (r) Whether the Tribunal was justified in law in holding that the petitioner had carried on its business only till twentyeigth day of August, One Thousand Nine Hundred and Forty (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 questiqn in the affirmative, and the second question in the negative. The Commissioner of Income-tax questioned the finding of the High Court and came up in appeal by special leave and contended 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. io(2)(vii) would be applicable ... Y ove111ber [1961] r960 in a case where the business continued for a part of the account year, even though the sale of machinery, plant, etc. took place The Commissione, after the closure of the business during the course of the account of Jn,ome-tax. year.

Bombay Ci"le I I Held, that if the profits or gains of a business for a partiv. . cular year are to be taxed, they must be computed for the whole Th~ l•lational year taking into account losses incurred during the same year, Synd"ate, Bombay 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 Joss 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 i~ 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) II I.T.R. 328, Commissioner of Income-tax v. Shaw Wallace & Co., Ltd., (1932) L.R. 59 I.A. 206, referred to. C:!vIL APPELLATE JURISDICTION: Civil Appeal 1 No. 280 of 1959. Hidayatullah ]. 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. R. Ganapa!hy Iyer and D. Gupta, for the Appellant. Banal 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 deliv!lred 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 J i -( under s. 66(2) of the Income-tax Act. The National r96o Syndicate, Bombay (referred to in this judgment as Tl c -. . ie om.missioner the respo~dent) was a. firm cons1stmg o three par~- of Income-tax, ners. This firm acqmred on January 11, 1945, a ta1. Bombay Circle JI loring business as a going concern from one Chambal Singh for Rs. 89,321/-. Included in this amount was The National the consideration paid for sewing machines (Rs. 72,000) Syndicate, Bombay and a motor lorr~ (Rs. 8,000). The assessment con- · Hidayatullah 1. cerns 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 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 H, 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, thti 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(2)(vii). 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 (1961) '960 obtained an order under s. 66(2) of the Income-tax The Co::;;bioner Act, and the following two questions '"'.ere refe~red: of Income-tax. "(1) Whether the Tribunal was JUStified Ill law Bombay Circle II in holding that the Petitioner had carried on its business only till twenty-eighth day of August one thou.

Th• National sand nine hundred and forty-five? Syndicate, Bombay (2) Whether on the facts and circumstances of Hidayatnllah J. 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 S!!le 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 cone] usion 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 the Department and partly because, in our opinion, there were adequate matel'ials for the High Court to have based its conclusion.

Inasmuch as we were in agreement i I with the High Court on the question of the applicabi· r960 lity of s. 10(2)(vii), we also felt that no useful purpose "Id b fi d The Commissioner wou e serve I? exammm~ t e matter to n out of Income-tax, whether the busmess had, m fact, closed on August Bombay Circle II 28, 1945 or had continued till the end of the account year. The N atio·•.al We are really concerned in this appeal with the Syndicate, Bombay interpretation of s. 10(2)(vii~ and its applicability to Hidayatullah j. 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 incomings 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 cont,ends 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 [1961] '960 business but is during the course of the winding up Th of the business, and the condition precedent to the onimissione1' 1. of Income-tax, app rcat10n of s. 10 IS that the business must be Bombay Circle II " carried on " by the person claiming the benefit of sub-s. (2). Reference in this context is made to the first The National sub-section of s. 10, where it is provided that the tax Syndicate, Bombay shall be payable by an assessee under the head "Pro- Hidayatullah J. fits and gains of business ...... " in respect of the profits or gains of any business,1etc., '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('). 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 s. l0(2)(vii) before its amendment in 1949. The second proviso reads : "Provided further that where the a.mount 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 underlined above were inserted by s.

11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949. In both the oases, the business had admittedly closed down before the sales took place, and it was held, applying the proviso a.s it was before the amendment of 1949, that such receipts were not taxable. The amendment now renders these oases obsolete. Reliance is, however, placed on certain observations in these cases, and it is contended that the same reasoning must be applied to a case ofloss 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 (I) [xg54] S.C.R. 767, (•) (1g6o) 40 LT.R. 38. was 1945-46, which corresponded to the accounting I9 60 year, October 1, 1943 to September 30, 1944.

Pursa 1.h c-· . omniissioner Limited were manufacturers of sugar, and sold the of Income-tax business on August 9, 1943, including buildings, Bombay Circle 'TI machinery and plant but excluding manufactured sugar worth about Rs. 6,00,000. This sugar was sold Th~ National tiJl June, 1944; but throughout the accounting period, Syndicate, Bombay the machinery, plant or buildings were not used. Hidayatullah J. 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. 'rhis 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 oper.ation " ; and (b)

"that the intention of the company was to dis~ continue 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 ptocess 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 [1961] 1 960 machinery or pfant not being used during the acc- The Co::;;i,,ion<r ounting peri~d at a_ll and in any_ event not havi~g ~ad of Income-tax. any connect10n with the carrymg on of that hm1ted Bo;nbay Circle JI business during the accounting year, section 10(2)(vii) can have no application to the sale of any machinery Th~ ~Vatiotial or plant." Syndicate, Bonibay Learned counsel for the respondent rehes upon the Hidayatullah J. passage last quoted, and urges that where the buildings, machinery or plant have been used for a pa.rt of the accounting period, the ruling cannot apply, and draws attention to the words " at a.II " used twice in the judgment.

He argues that if th'e 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 ha.ck what had been given a.way 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 pnblishing its daily newspapers to Express Newspapers Ltd. They rented out their machinery, etc., to the new Company, which took possession on September I, 1946. The year of account ended on December 31, 1946.

The Free Press went into voluntary liquidation on October 31, 1946 and on November I, 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. IO (2)(vii) applied. The Madras High Court observed: (1) (1960) 40 I.T.R. 38. " ...... in the present case the sale of the mac hinery took place during the year of account, and it Th c --.. omniissioner was used by Free Press Company for at least a part of of Income-tax, the year. This would be sufficient to attract liability.

Bombay Circle II The learneJ counsel for the assessee is on a firmer ground when he contended that the sale being made 1he National in the process of winding up of the company section Syndicate, Bombay 10(2)(vii) will not apply. The second proviso to sec- Hidayatullah 1. tion 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 Incometax (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 b'usiness 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 Muld not come in· for assessment under section 10(2)(vii)." These two cases deal with the second proviso to. s. 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 wa.ys. If the business requires more to run it tha.n it produces, there is loss. Loss in (1) (1954] s.c.R. 767· [1961] '960 business may also take place if the equipment with T ' c--. . which busiuess is done is lost, destroyed, or depreommisstoner • fli of Income-tax c1ates or su era m value.

The law takes note of the Bombay Circle 'n loss, and, provided it has been computed and brought into the books of the business and written off, it can Th'. National be claimed as a deduction. Profit in business, on the Syndicate. Bombay other hand, primarily, means profit earned in the buai- Hidayatullah J. ness. But if an allowance had been claimed as depreciation and had been allowed, and if the so.le 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 dou ht 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 closure of the business. It is thus clear that the principles which govern the proviso cannot be used to govern the ma.in clause, because profit or loss a.rise 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. T]le scheme of the Income-tax Act, as was pointed out by Lord Porter in Indian Iron & Steel Go. 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) n l.T.R. 3z8, 336. and gains into six heads in s. 6. The fourth head is Ig6o " Profits and gains of business, profession or voca- S 7 8 9 10 12 12A d 12B 1 .d The Commissione> t10n . ect1ons ' , ' an ay own f Income-tax the rules of computation under the different heads. s:mbay Cfrcle ·II Profits and gains of business are dealt with in s. 10. The first sub-section of that section provides: The National " The tax shall be payable by an assessee under Syndicate, Bombay the head 'Profits and gains of business .... ' in respect Hidayatullah J. of the profit or gains of any business ...... cal'!'ied 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 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 au 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 (9), 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, !l.nd makes allowance for such eventualities. · If the profits or gains of a business for a particular year a.re 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. 76'/. SlJPREMJ<.: COURT REPOR'l'S [1961] '960 " carried on by the asses see ". This is to be found in Th C -. . the first sub-section of s. 10. The second· condition is ommi.<sioner h h b "Id· l Ii of Income-tax t at t e m mg, mac mery or pant must ·ave been Bombay c;"'' 'n" used for the purposes of the business ". This is to be found in cl. (iv) of the second sub-section of s. 10. The National The third condition is that the sale etc. should have Syndicate, Bombay taken place during the year of account:

This follows from the nature of the tax which is assessed and Hidayatullah }. 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 t.he section or in the Act. It is now here 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 ymuand then sells out, the loss that he incurs is not a bu.siness loss, or that he must pay tax on the small profit that he might have made, and bear the loss 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.