1964 (5) TMI 3 - SC - Income Tax

Whether the Free Press Company made a business profit of ₹ 2,14,090 under the proviso to section 10(2)(vii) of the Act ? Whether the capital gain made by the Free Press Company is liable to be assessed in the hands of the Express Company, under section 26(2) of the Act ? Held that - The first item is not liable to tax and the High Court has given the correct answer to the first question submitted to it. As we have held, the scope of sub-section (2) of section 26 is only limited to the income from the business, the share under sub-section (2) and the assessment and realisation under the proviso can only relate to the income from the business. The argument is really begging the question itself. In the result we agree with the High Court in regard to the answer it has given in respect of the second question. Appeal dismissed.

Issues Involved:
1. Business profit under the proviso to section 10(2)(vii) of the Income-tax Act, 1922.
2. Capital gain assessment under section 26(2) of the Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Business Profit under Proviso to Section 10(2)(vii):
The core issue was whether the Free Press Company made a business profit of Rs. 2,14,090 under the proviso to section 10(2)(vii) of the Income-tax Act, 1922. The proviso to section 10(2)(vii) states that if the sale price of machinery exceeds the written down value but does not exceed the original cost price, 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 court emphasized that for the proviso to apply, the following conditions must be met:
1. The business must have been carried on by the assessee during the accounting year.
2. The machinery must have been used in the business.
3. The machinery must have been sold while the business was being carried on and not for the purpose of closing it down or winding it up.

In this case, the machinery was sold after the business was closed and during the liquidation proceedings. Therefore, the sale did not meet the conditions stipulated in the proviso. The court referred to the decision in Liquidators of Pursa Ltd. v. Commissioner of Income-tax, which held that profits from the sale of machinery after business closure and during winding-up proceedings are not taxable under section 10(2)(vii). Consequently, the court concluded that the first item of Rs. 2,14,090 is not assessable to tax.

2. Capital Gain Assessment under Section 26(2):
The second issue was whether the capital gain of Rs. 3,94,576 made by the Free Press Company is liable to be assessed in the hands of the Express Company under section 26(2) of the Income-tax Act, 1922. Section 26(2) deals with the assessment of income, profits, and gains of a business when there is a succession. The proviso to section 26(2) states that if the person succeeded cannot be found, the assessment of the profits of the year in which succession took place up to the date of succession, and for the year preceding that year, shall be made on the person succeeding.

The court clarified that section 26(2) and its proviso deal only with income, profits, and gains of the business, which fall under the fourth head of section 6, i.e., "profits and gains of business, profession or vocation." Capital gains, on the other hand, fall under the sixth head of section 6 and are computed separately under section 12B. The court emphasized that the fiction created by section 12B, which deems capital gains to be income of the previous year, does not convert them into profits or gains of the business. Therefore, section 26(2) does not apply to capital gains.

The court concluded that the capital gains of Rs. 3,94,576 are not assessable in the hands of the Express Company under section 26(2). The High Court's decision to answer the second question in the negative was upheld.

Conclusion:
The Supreme Court dismissed the appeal, agreeing with the High Court's judgment that neither the business profit of Rs. 2,14,090 nor the capital gain of Rs. 3,94,576 is assessable in the hands of the Express Company. The appeal was dismissed with costs.

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