1962 (3) TMI 5 - SC - Income Tax

Whether there can be said to be a sale in the carrying on of the business in respect of the chemicals and other raw materials? Held that - It is impossible to infer that the chemicals and raw materials were sold in the ordinary way of business or that the assessee-company was carrying on a trading business. The fact that the clause in the memorandum gave power to the company to sell chemicals cannot be used in this connection, because the evidence clearly shows that that clause was never used and the two sales of chemicals through the years were too petty in themselves to afford evidence of a continued or sustained trading in chemicals. In our judgment, this was a winding up sale with a view to realising the capital assets of the assessee-company and not a sale in the course of business operations, which alone would have attracted tax, if profit resulted. Appeal dismissed.

Summary

Issues Involved:
1. Whether the transaction of sale of the raw materials along with the business, including machinery, plant, and premises, is a revenue sale and whether the sum of Rs. 1,15,259 has been rightly charged to income-tax.
2. Whether the decision that the sale of match machinery and premises was distinct from the sale of chemicals is legally warranted and whether there was legally a single transaction of the entire match factory inclusive of raw materials.

Detailed Analysis:

Issue 1: Revenue Sale and Taxability of Rs. 1,15,259
The primary issue was whether the sale of raw materials along with the business assets constituted a revenue sale, thereby making the profit of Rs. 1,15,259 liable to income-tax. The Deputy Commissioner of Income-tax assessed the profits from the sale of chemicals and paper for manufacture, initially escaping assessment, as a trading profit based on the memorandum of association and the directors' report. The High Court, however, ruled that the sale was a realisation sale and not a business transaction, thus not liable to tax.

The Supreme Court examined precedents like *Californian Copper Syndicate v. Harris* and *Tebrau (Johore) Rubber Syndicate Ltd. v. Farmer*, distinguishing between trading activities and realisation sales. The Court noted that the sale in question was part of winding up the business rather than continuing trading operations. The evidence showed that the company was not engaged in sustained trading of chemicals, and the sale was to realize capital assets, not for trading purposes. Therefore, the profit was not assessable to income-tax.

Issue 2: Distinction Between Sales of Match Machinery and Chemicals
The second issue was whether the sale of match machinery and premises was distinct from the sale of chemicals, or if it constituted a single transaction. The Tribunal found that the business had not ceased entirely and considered the sale as having trading characteristics. However, the High Court disagreed, stating that the sale was a realisation sale.

The Supreme Court supported the High Court's view, emphasizing that the sale of chemicals and raw materials was part of winding up the business. The Court referred to cases like *Doughty v. Commissioner of Taxes* and *Commissioner of Taxation (W. A.) v. Newman*, which differentiated between trading sales and winding up sales. The Court concluded that the sale of chemicals was not a trading activity but a step to close down the business, thus not liable to tax.

Conclusion:
The Supreme Court upheld the High Court's decision, ruling that the sale of raw materials and chemicals was a realisation sale as part of winding up the business, and not a revenue sale. Consequently, the profit of Rs. 1,15,259 was not chargeable to income-tax. The appeal by the Commissioner of Income-tax was dismissed with costs.