1964 (10) TMI 21 - SC - Income Tax

Whether the assessee was properly assessed on ₹ 4,25,050 as profits under the proviso to section 10(2)(vii) of the Act? Whether there were materials for the Tribunal estimating the sale value of the buildings at ₹ 2,32,963 ? Held that - By the fiction, if the business must be deemed to be in existence during the previous year and that the buildings sold must be deemed to have been used for the business during that year, the amendment was not necessary. If it existed, there could not have been a cessation of it during the previous year. If the argument was correct, there would be no time-limit for the assessment of the surplus. Whenever a building was sold, whatever might be the time lag, by fiction, the business, as well as the user of the building in that business would be in the previous year by the year of assessment. We cannot accept a contention yielding such a result unless it is so clearly expressed. Indeed, the expressed intention of the legislature is the other way. We therefore hold that the amendment only removed one of the conditions for the exigibility of the said surplus to tax, namely, the cessation of the business and in other respects, the construction put upon the proviso by the earlier decisions of this court is still good law. In our view, the answers given by the High Court to the questions propounded are correct. Appeal dismissed.

Issues Involved:
1. Jurisdiction of the High Court to set aside the Tribunal's finding of fact.
2. Applicability of the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, post-amendment by Act 67 of 1949.

Detailed Analysis:

1. Jurisdiction of the High Court to Set Aside the Tribunal's Finding of Fact:
The first issue revolves around whether the High Court had the jurisdiction to set aside the Tribunal's finding that the profit on the sale of the buildings was Rs. 1,25,000. The Tribunal's valuation was based on assumptions rather than concrete evidence. The High Court observed that the Tribunal did not reject the genuineness of the valuation made by the experts and had no material for the estimates it purported to make. As the Tribunal's finding was not based on any evidence, the High Court was entitled to go behind that finding and answer the question referred to it in the negative.

2. Applicability of the Second Proviso to Section 10(2)(vii) Post-Amendment:
The second issue is whether the second proviso to section 10(2)(vii), after its amendment by Act 67 of 1949, applies to deemed profits irrespective of whether the buildings and machinery were used for the business in the previous year. The relevant provisions of the Income-tax Act state that the tax shall be payable in respect of profits or gains of any business carried on by the assessee, and the second proviso deems the excess of the sale amount over the written down value as profits of the previous year.

The High Court had held that the said machinery and buildings were not used for the purpose of the business during any part of the accounting year, and hence, the profits were not liable to tax under the second proviso to section 10(2)(vii). The Supreme Court examined the legislative intent and the scope of the proviso before and after the amendment. It was noted that the amendment introduced the words "whether during the continuance of the business or after the cessation thereof," which removed the condition that the sale must occur during the continuance of the business.

However, the Supreme Court emphasized that the proviso should be construed harmoniously with the main enactment. The fiction introduced by the proviso is limited to deeming the surplus as profits of the previous year. The court held that the amendment only removed the condition of cessation of business but did not alter the requirement that the business must have been carried on during the accounting year and the machinery used in that business.

The court referred to its earlier decisions in Liquidators of Pursa Limited v. Commissioner of Income-tax and Commissioner of Income-tax v. Express Newspapers Ltd., which laid down that the machinery must be used in the business during the accounting year and sold while the business was being carried on. The amendment did not change this interpretation.

The Supreme Court concluded that the surplus is not exigible to tax unless the assessee did business during the accounting year preceding the assessment year and the buildings or machinery yielding surplus were used for the business in that year or part of the year, even if sold after the cessation of the business. The court rejected the revenue's argument that the proviso is a substantive charging section and that the fiction should be extended to deem the business and usage of machinery during the previous year.

Conclusion:
The Supreme Court upheld the High Court's decision, holding that the amendment to the second proviso to section 10(2)(vii) did not alter the requirement that the business must have been carried on during the accounting year and the machinery used in that business. The appeal was dismissed with costs.

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