1969 (2) TMI 8 - SC - Income Tax

Mining business - accounting year - company obtained a prospecting licence after prospecting for coal sold the colliery, and thereby earned a profit of Rs. 51,550 - impugned profit is in nature of revenue hence liable to income tax - similarly loss of Rs. 34,891 was allowable as a deduction against the business income

Summary

Issues:
1. Taxability of profits from the sale of a colliery for assessment years 1949-50 and 1950-51.
2. Allowability of a loss incurred from the sale of a Dry Ice Factory against business income for assessment year 1950-51.

Analysis:
For the assessment years 1949-50 and 1950-51, the High Court was tasked with determining the taxability of profits earned from the sale of a colliery and the deductibility of a loss incurred from the sale of a Dry Ice Factory. The company, engaged in various businesses including coal mining, sold the colliery and the factory in separate transactions.

In the case of the colliery sale, the High Court opined that the transaction was part of the company's trading activities, as the colliery was sold after prospecting and proving coal, indicating a trading venture rather than a capital asset disposal. The court emphasized that the profit earned was not of a capital nature but in the nature of revenue, thus subject to tax.

Regarding the loss incurred from the sale of the Dry Ice Factory, the Tribunal and the High Court initially disallowed the deduction for the assessment year 1950-51, citing that the business of the factory was not operational during that period. However, the Supreme Court disagreed, pointing out that the loss was suffered in the account year 1949-50 when the price was finally settled, making it eligible for deduction against the income of that year under section 24(1) of the Income-tax Act, 1922.

The Supreme Court's analysis included references to precedents such as Commissioner of Taxes v. Melbourne Trust Ltd. and T. Beynon & Co. Ltd. v. Ogg to distinguish between capital gains and business profits. The court highlighted that the nature of the transaction, whether isolated or integral to the taxpayer's business, is crucial in determining tax liability.

Ultimately, the Supreme Court upheld the High Court's decision on the taxability of profits from the colliery sale for both assessment years. However, the court ruled in favor of the company regarding the deductibility of the loss from the Dry Ice Factory sale, emphasizing that the loss was suffered in the relevant account year and should be allowed as a permissible deduction. Consequently, the answer to question No. (4) was affirmed in favor of the company, leading to a divided success and no order as to costs in the Supreme Court.