1961 (3) TMI 143 - HC - Income Tax

Summary

Issues Involved:

1. Whether the surplus of Rs. 2,51,576 over the written down value of the depreciation assets of the business of distributing electrical energy to the consumers was profit of the assessee chargeable to tax under section 10(2)(vii) of the Income Tax Act.
2. Whether the assets sold before the commencement of the relevant accounting period were comprised within the term "such plant, machinery, or building" as used in clause (vii).
3. Whether the business activity of the assessee concerning the distribution of electric energy to the consumers had ceased before the commencement of the relevant accounting period.

Issue-wise Detailed Analysis:

1. Chargeability of Surplus as Profit under Section 10(2)(vii) of the Income Tax Act:

The assessee, Rohtak and Hissar Districts Electric Supply Co. Ltd., sold its assets related to the distribution of electric energy to the South Punjab Electricity Corporation (Private) Ltd. on January 1, 1955, resulting in a profit of Rs. 2,51,576. The department considered this amount liable to tax under the second proviso to clause (vii) of sub-section 10. The Tribunal confirmed this treatment and dismissed the assessee's appeal. However, the High Court found that the assets were sold before the commencement of the accounting period and thus did not attract the operation of clause (vii).

2. Inclusion of Assets Sold Before the Accounting Period in "Such Plant, Machinery, or Building":

The assessee argued that the assets sold to the South Punjab Electricity Corporation before the relevant accounting period would not be comprised within the term "such plant, machinery, or building" as used in clause (vii). The High Court upheld this argument, referencing the Supreme Court's ruling in Liquidators of Pursa Ltd. v. Commissioner of Income Tax, which stated that machinery or plant must be used for the purpose of business during the accounting year to attract the operation of clauses (v), (vi), and (vii) of section 10(2). Since the assets were not used during the accounting year, they could not be deemed as profits of the previous year.

3. Cessation of Business Activity Before the Accounting Period:

The assessee contended that its business activity concerning the distribution of electric energy had ceased before the relevant accounting period. The High Court agreed, finding that the activity of distributing electricity, along with the assets and liabilities, was sold to the newly floated company before the commencement of the accounting year. The Tribunal's reasoning that the assessee retained its licence for distribution was found to be contrary to its earlier finding and was not supported by the respondent's counsel.

Conclusion:

The High Court concluded that the first contention advanced by the assessee must prevail, and the surplus amount of Rs. 2,51,576 was not chargeable to tax under section 10(2)(vii) of the Income Tax Act. The reference was answered in the negative, and the assessee was awarded costs against the respondent, assessed at Rs. 250.

Separate Judgments:

A.N. Grover, J. concurred with the judgment delivered by S.B. Capoor, J.